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Futures fall, yields rise after hot economic data

The Exchange Square Complex, which houses the Hong Kong Stock Exchange, is shown in Hong Kong, China, on July 13, 2022.   (Paul Yeung/Bloomberg)
By Rita Nazareth Bloomberg

Treasury yields climbed and stocks struggled after solid economic reports reinforced the case for the Federal Reserve to keep interest rates higher for longer.

Two-year U.S. yields hit the highest since 2006, while those on 10-year notes jumped 13 basis points to 4.83%.

Swap contracts tied to Fed rate decisions showed traders are pricing in more than 60% odds that policymakers will raise interest rates by another quarter percentage point in January after holding steady in November.

A move in December is considered possible, but less likely than January.

The S&P 500 erased gains, led by losses in its most-influential group – technology. Nvidia Corp. slumped as the U.S. is restricting the sale of chips the company designed for the Chinese market.

Goldman Sachs Group Inc. fell amid a 33% slide in profit. Bank of America Corp. advanced after traders reported their best third-quarter results in more than a decade.

“Good news about the economy is once again bad news, since it will keep policymakers on the fence on delivering more tightening,” said Edward Moya, senior market analyst for the Americas at Oanda. “It seems the U.S. economy isn’t ready to head into a recession just yet.”

Retail sales exceeded all forecasts and industrial production strengthened last month, fresh evidence of a resilient American consumer whose spending is helping stabilize manufacturing. The reports prompted a slew of economists, from Goldman Sachs to JPMorgan Chase & Co. and Morgan Stanley, to boost their tracking estimates for third-quarter gross domestic product.

Fed Bank of Richmond President Thomas Barkin said policymakers “have time” to work out whether they can hold interest rates steady or if they need to raise them further to get inflation to policymakers’ 2% goal.

Traders also kept a close eye on the latest geopolitical events, with President Joe Biden set to travel to Israel Wednesday as a show of solidarity after the Oct. 7 attack by Hamas – which is designated a terrorist organization by the US and European Union.

The Israeli military struck the south of the Gaza Strip after ordering people to seek refuge there.

The Bank of Israel underscored the urgency of steadying the shekel following its slide to an eight-year low, reversing expectations among traders who bet on a big interest-rate cut as soon as next week.

Elsewhere, the Bank of Japan is likely to discuss raising its inflation projection for fiscal year 2023 and 2024 at its policy meeting later this month, extending the period in which it sees prices hitting or exceeding its 2% goal, according to people familiar with the matter.

Following news of the central bank price view, the yen briefly strengthened.