Stocks falter as economic worries nag, NZ delivers big rate hike

By Dhara Ranasinghe

LONDON (Reuters) -World stocks stumbled on Wednesday as signs that the economic outlook is weakening spurred some caution, while the dollar edged back from two-month lows.

The Reserve Bank of New Zealand raised rates by 50 basis points to a 14-year high at 5.25%, a reminder that world central banks are not done with monetary tightening just yet.

European stocks fell with the broad STOXX 600 index pulling away from Tuesday’s one-month highs. U.S. equity futures dipped and Japan’s Nikkei fell 1.6% in its biggest one-day percentage fall since mid-March.

MSCI’s world equity index pulled further away from Tuesday’s almost seven-week highs, while Asia trade was thinned by holidays in Hong Kong and China.

Weak U.S. economic data this week has exacerbated recession worries, taking the edge off recent stock market gains.

Data on Tuesday showed U.S. job openings fell in February to the lowest level in almost two years and data on Monday pointed to weakening U.S. manufacturing activity.

The euro zone recovery picked up pace last month but the upturn was uneven across industries and countries, a survey on Wednesday showed. U.S. March service sector activity data is due out later.

Interest rate futures have rallied strongly in recent weeks as traders bet that turmoil in the banking sector will tighten up on lending anyway and save the need for the Federal Reserve to do the job.

Markets pricing implies a better-than-even chance that the Fed has finished raising rates and more than 60 bps in cuts this year.

“With the banking worries at least in the background for now focus is on the economic data and central bank policy,” said Nordea chief analyst Jan von Gerich.

“There is no fixed way of interpreting the data in markets but it does seem that latest data was not seen as positive for equities by raising growth worries.”

In a note, Pictet Asset Management chief strategist Luca Paolini said that with focus turning from inflation to growth risks, Pictet had upgraded U.S. equities to neutral from underweight.

DOLLAR RESPITE

The dollar index edged up from two-month lows and the currency pulled back from its lowest levels since August 2021 against the Swiss franc at around 0.9042.

The greenback, which has been hurt by the view that the Fed tightening cycle was drawing nearer, also clawed back some ground against the euro and sterling.

New Zealand’s currency, also known as the kiwi dollar, briefly jumped to its highest since mid-February after the country’s central bank hiked rates again.

But it was last down just a touch at $0.6309 as the dollar bounced back broadly.

Outside the United States, markets see other central banks staying the course on hikes to tame inflation. A Reuters poll of FX strategists found most expect that to keep pressure on the dollar this year.

Government bond yields have been moving lower in recent weeks, reflecting expectations for weaker growth and a pause in monetary tightening. Two-year U.S. Treasury yields were last down around 2 bps at 3.82%, well below highs above 5% seen just before the collapse of Silicon Valley Bank last month.

“We’re not quite done with the tightening cycle, but we’re getting closer,” said Jim Cielinski, global head of fixed income, Janus Henderson.

In Europe, government bond yields were broadly steady after being whipped around sharply in recent weeks.

Gold, which pays no yield, hit a fresh one-year high above $2,000 an ounce. It was last up just 0.13% at $2,023 an ounce.

Commodity markets were settling down after Monday’s surge in oil prices on news of surprise OPEC+ production cuts.

Brent crude futures were little changed at $84.95 a barrel. West Texas Intermediate U.S. crude was also flat, trading at around $80.73 a barrel.[O/R]

(Reporting by Dhara Ranasinghe; Editing by Conor Humphries and Alison Williams)