Stocks rally, US Treasury yields fall as US economy shrinks

  • US GDP fell 0.9% in the second quarter for a second consecutive decline
  • US Treasury Yields Fall, Dollar Rises
  • Wall Street rises, European stocks close higher

NEW YORK, July 28 (Reuters) – Wall Street stocks rallied on Thursday, while Treasury yields fell for the third straight day as investors digest data showing a U.S. economy in decline for a second straight quarter , a day after the Federal Reserve raised interest rates.

The dollar fell to a six-week low against the yen, following lower Treasury yields after the economic data, which fueled speculation that the Fed will not raise rates as aggressively in the future. Read more

US gross domestic product (GDP) in the second quarter fell at an annualized rate of 0.9%, according to the Commerce Department’s preliminary estimate. That compares with economists’ expectations for growth of 0.5% and came after a 1.6% contraction in the first quarter. Read more

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The data follows the Fed’s pledge on Wednesday not to flinch in its battle with the most intense U.S. inflation since the 1980s, even if it means an “extended period” of economic weakness and a market slowdown of employment. Read more

U.S. stocks had also rebounded on Wednesday as comments from Fed Chairman Jerome Powell prompted bets that rate hikes would start to slow and lead to rate cuts in 2023.

Thursday’s drop in Treasury yields implied bets for a more gradual pace of tightening going forward, according to Mona Mahajan, senior investment strategist at Edward Jones, who also noted that GDP had fallen at a time when the The Fed hadn’t raised rates much.

“It will certainly be an interesting balance between hopefully moderating inflation, but then consumers will have to deal with a tougher economic backdrop,” Mahajan said. “We do not see the possibility of a deep and prolonged recession, but the slowdown that the market is pricing in should materialize over the next two quarters, possibly even in the first quarter of 2023.”

While the S&P has “done a lot of the work on the downside on pricing in a mild recessionary environment,” Mahajan sees more volatility ahead as “fundamentals play a bit of a catch-up.”

After a weaker start to the day, US stocks turned positive an hour into the trading session and took off from there.

The Dow Jones Industrial Average (.DJI) rose 332.04 points, or 1.03%, to 32,529.63, the S&P 500 (.SPX) gained 48.82 points, or 1.21%, to 4,072.43 and the Nasdaq Composite (.IXIC) added 130.17 points, or 1.08%, to 12,162.59.

The MSCI gauge of stocks around the world (.MIWD00000PUS) gained 1.24%.

Although Europe is facing a gas crisis and an expected recession, the pan-European STOXX 600 index (.STOXX) rose by 1.09%.

In bond markets, yields on two-year Treasury bills fell further on Thursday after falling below 3% on Wednesday.

The spread between two- and ten-year Treasury yields, seen as a signal of recession when the short is higher than the long, narrowed on Thursday. The gap narrowed sharply on Wednesday.

Benchmark 10-year notes last rose 17/32 to 2.6723%, down from 2.732% late Wednesday. The 30-year bond last fell 12/32 to 3.0219% from 3.002%.

The 2-year note last rose 6/32 to 2.8723% from 2.972%.

In currencies, the dollar index fell 0.197%, the euro down 0.06% to $1.0196. Read more

“For now, the market is operating on the idea that slowing growth will cause the Fed to blink and we’re entering a recession,” said Mazen Issa, senior FX strategist at TD Securities in New York.

The Japanese yen strengthened 1.71% against the greenback at 134.27 to the dollar, while the pound last traded at $1.218, up 0.24% on the daytime. XRF

As the euro faces an energy crisis, the IMF has warned that if Russia, which cut gas supplies to Europe this week, cuts off supplies completely by the end of the year, the region could experience zero economic growth next year. Read more

Oil prices were mixed as fears of a global recession hitting energy demand were offset by falling crude inventories and a rebound in US gasoline consumption.

U.S. crude settled at $96.42 a barrel, down 0.86% while Brent was down 0.49% at $107.14 on the day.

Spot gold gained 1.3% to $1,756.59 an ounce as the shrinking US economy boosted its safe haven allure.

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Additional reporting by Marc Jones in London, Karen Brettell in New York, Wayne Cole in Sydney and Sujata Rao in London; Editing by Shounak Dasgupta, Catherine Evans, Will Dunham and Barbara Lewis

Our standards: The Thomson Reuters Trust Principles.

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