Stocks Gain, Dollar Dips As Fed Hike View Scaled Back

A gauge of global stocks rose for a second straight day on Monday and the dollar weakened as investors dialed back expectations the Federal Reserve will take a more aggressive approach in hiking interest rates next week and the U.S. corporate earnings season picks up steam.

Expectations for a 100 basis points rate hike by the Fed at its policy meeting next week stood at about 31%, according to CME's FedWatch Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?redirect=/trading/interest-rates/fed-funds.html after reaching as high as 80% last week.

Recent readings on inflation came in above expectations but showed signs that higher prices may be starting to ease, giving the U.S. central bank a possible cushion to raise rates at a smaller 75 basis points increment.

"As we as we entered into the quiet period, the Fed seems to be leaning more towards 75 basis points than to 100 basis points," said Jim Barnes, director of fixed income at Bryn Mawr Trust.

"The more recent economic data that we got on Friday was more upbeat and today's rising Treasury yields seem to be catching up with the market's activity from Friday as well as the equity market from today."

Stocks on Wall Street, however, were roughly unchanged after pulling back from earlier highs as bank stocks, up 0.1%, gave back gains of almost 3% on the heels of earnings from Goldman Sachs, up 2.0% and Bank of America, up 0.3%.

The Dow Jones Industrial Average fell 25.61 points, or 0.08%, to 31,262.65; the S&P 500 lost 4.87 points, or 0.13%, to 3,858.29; and the Nasdaq Composite added 3.26 points, or 0.03%, to 11,455.69.

Of the 40 S&P 500 companies that have reported earnings through Monday morning, 80% have been above estimates, per Refinitiv data, tracking slightly below the 81% rate over the past four quarters.

The pan-European STOXX 600 index rose 0.93% and MSCI's gauge of stocks across the globe gained 0.56%. European stocks closed off a three-week high hit earlier in the day on worries about an energy shortage in the region.

Benchmark 10-year U.S. Treasury notes last fell 9/32 in price to yield 2.9633%, from 2.93% late on Friday.

Prior to the Fed meeting next week, the European Central Bank is poised to raise rates for the first time in more than a decade on Thursday, with a hike of 25 basis points expected, while Italy grapples with a political crisis after Prime Minister Mario Draghi tendered his resignation last week, a move that was rejected by the country's president.

As the region deals with its own inflationary pressures, Russia's Gazprom told customers in Europe it cannot guarantee gas supplies because of 'extraordinary' circumstances, according to a letter from Gazprom that will add to European fears of fuel shortages.

In light of the changing view of next week's Fed meeting, the U.S. dollar retreated from the 20-year high hit last week, helping the euro move away from parity against the greenback.

The dollar index fell 0.464%, with the euro up 0.64% to $1.0152.

The Japanese yen strengthened 0.35% versus the greenback to 138.08 per dollar, while Sterling was last trading at $1.1957, up 0.89% on the day.

Oil prices extended gains, boosted by mounting concerns over gas supply from Russia and a lower dollar, offsetting demand fears brought on by a possible recession and China lockdowns.

U.S. crude recently rose 4.04% to $101.53 per barrel and Brent was at $105.48, up 4.27% on the day.