Punchy US data shoves stocks toward biggest weekly fall of year

World stocks tumbled towards their biggest weekly fall of the year on Friday and both the dollar and bond market borrowing costs darted higher again as punchy US economic data had traders braced for more profit-sapping interest rate hikes.

Comments from the Bank of Japan's new incoming chief backing super-easy monetary policy had briefly lifted markets overnight but the selling snowballed again as the US personal consumption expenditures price index notched its biggest rise since June.

There was focus too on the first anniversary of Russia's invasion of Ukraine, which Moscow terms a "special military operation", as calls for peace, but also warnings about a wider escalation, came from both Washington and Beijing.

It was the expectation of more rate hikes though that saw Wall Street's S&P 500 open roughly 1 per cent lower, Europe's bourses extend losses and MSCI's worldwide share index fall 1.15 per cent for the day and 2.6 per cent for the week.

US Treasury yields jumped, with two-year yields - which are highly sensitive to Federal Reserve rates - hitting 3-1/2 month highs and the dollar adding to what was already a 7-week peak.

Close Brothers Asset Management's Chief Investment Officer, Robert Alster, said markets were upbeat about the strength of consumer spending in many of the major economies at the moment but also wary about inflation staying higher for longer and extending the rise in interest rates.

"That is why were are all hanging on each data point," Alster said. "There is a feeling it is going to be volatile, a bit like being cautiously optimistic skating on thin ice" he added. "We are virtually neutral now on all asset classes."

Europe's stocks markets couldn't maintain what had been a positive start with the pan region Euro Stoxx 600 down 0.6 per cent after Wall Street's bumpy restart.

Fed funds futures traders were ratcheting up bets on 3 more Fed hikes in the coming months, which if realised would push US interest rates up to around 5.38 per cent by July, from a current 4.50-4.75 per cent range.

The US central bank has raised its policy rate by 450 basis points since last March from near zero.

Overnight, Kazuo Ueda, who will take over as governor of the Bank of Japan (BOJ) in April, had told a confirmation hearing that ultra-low interest rates were still needed to support Japan's fragile economy, warning of the dangers of responding to cost-driven inflation with monetary tightening.

Europe's benchmark bond yields had initially dipped when Germany, the bloc's industrial power-house, said its economy shrank by slightly more than initially predicted in the fourth quarter of 2022, but popped up again after the US data

Unwelcome anniversary

Wall Street's early tumbles came after it had ended a topsy-turvy session in positive territory for the first time in five attempts on Thursday. It too is heading for its worst week of the year.

The expectations that US interest rates may well need to rise for longer meant the dollar index, which measures the top world currency against six other majors, was up 0.7 per cent at a seven-week high and back above the 105 level. On Thursday, an unexpected fall in new claims for unemployment and a revised uptick in the fourth-quarter PCE price index, had also pointed to lasting strength in the world's largest economy.

"Honestly, I'm surprised people were surprised by the PCE data," said Allspring Global Investments' strategist Brian Jacobsen. "We already knew retail sales in January were stronger than expected. We also knew from the CPI data that inflation was hotter than expected."

A year on from Russia sending its troops into Ukraine, the focus remained the loss of life and long-term geopolitical implications, although the spillovers of the war have had a major impact on financial markets.

Aaron Dunn, co-head of value equity at Eaton Vance, said the most obvious had been the sharp increase in oil and gas and agricultural prices when the war broke out. Notably though, most of those moves have been completely reversed.

"You have basically retracted a fair amount of the gains in most of the energy markets in the back half of 2022," Dunn said, highlighting that the slump in natural gas prices following a mild winter meant gas use was now replacing coal again in Europe.

"That has helped the global economic picture," he explained. "The big qUSion is now the top line, the economic performance, and in that respect China's reopening will play an oUSzed role in the direction we go from here."

Credit rating agency Moody's meanwhile forecast that RUSa's economy would shrink 3 per cent this year as Western powers pile on more sanctions. The United States, Europe and other G7 nations all announced fresh measures on Friday.

The overnight comments from BOJ head-elect Ueda on Japan's easy-money policy had seen Japan's Nikkei share index close up 1.3 per cent, while its five-year government bond yield eased to 0.235 per cent.

Ten-year Japanese bonds didn't trade on Friday due to thin liquidly, after breaching the upper limit of the BOJ's policy cap for two straight days. But the yen turned choppy as data also showed core consumer inflation there hit a 41-year high.

Meantime, MSCI's broadest index of Asia-Pacific shares oUSde Japan fell 1.3 per cent, for a hefty weekly drop of 2.5 per cent.

In particular, Chinese blue chips tumbled 1 per cent and Hong Kong's Hang Seng Index dropped 1.6 per cent after comments from US officials that Washington would increase the number of troops helping train Taiwan's forces.

In the oil market, Brent crude futures rose 0.8 per cent to $82.84 while US West Texas Intermediate (WTI) crude was also up 0.8 per cent at $75.99.

Gold was fractionally higher at a spot price of $1,824.89 per ounce although it was on coUS for a fourth straight weekly drop.

• Business