Updated at 4:15 pm EST
Stocks finished lower Monday, while the dollar reversed losses against its global peers, as investors faded bets on easing Covid restrictions in China and focused on the prospect of near-term recession in the world’s biggest economy.
Portions of that focus were challenged, however, by a stronger-than-expected reading for service sector activity over the month of November, with the ISM’s non-manufacturing PMI index rising to 56.5 points, well above the 50 point mark that separates growth from contraction.
The jump added heft to bets on a more hawkish Fed, following on from last week’s Labor Department report that showed U.S. employers added 263,000 new hires last month, with average hourly earnings rising by 0.6%.
That was double the Street consensus forecast and rekindled concerns that the tight labor market will continue to stoke inflation pressures into the early months of next year.
Benchmark 10-year Treasury note yields were up to 3.596% in late day trading, while 2-year note yields rose to 4.406%.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.74% higher at $105.32 after hitting early June lows of 104.30 earlier in the session.
Multiple reports overnight have noted a modest easing of various pandemic-era rules in China, with cities across the country removing demands for negative Covid tests to use public transport and re-opening malls, parks and movie theatres in the wake of rate public unrest in the world’s second-largest economy late last month.
The changes helped boost China stocks in overnight trading, with the Shanghai Composite rising 1.76% on the session and the region-wide MSCI ex-Japan benchmark gaining 1.7%.
However, data showing a fifth consecutive contraction in economic activity in Europe, and highlighting the prospect of an early 2023 recession, blunted the impact of China’s loosening Covid policy and clip overnight gains for U.S. stocks, which are also fighting against the prospect of tighter Federal Reserve policy following the firmer-than-expected reading of November job gains last Friday.
Wall Street is likely to focus on market reaction to Friday’s stronger-than-expected November jobs report, as well as developments in China’s Covid crisis, in what is expected to be a quiet week for earnings and data releases.
Producer price inflation figures on Friday, as well as trade and export data Tuesday, are the key economic data points in focus as traders piece together their 2023 forecasts amid a rising debate over the chances of recession in the world’s largest economy.
Other releases include factory orders and ISM Services data on Monday, weekly jobless claims on Thursday and what could be an important reading of consumer sentiment from the University of Michigan’s closely-tracked survey on Friday.
Recession concerns, however, are holding down Treasury bond yields s investors look to a rapidly-weakening housing market, a still-hawkish Fed and contracting business activity heading into the final months of the year.
“We may have seen, or be seeing, peak inflation but it is not until we see weakness in labour markets that headline inflation will reach the 2% target that is common to most major central banks,” said Nigel Green, CEO of London based deVere Group.
“To achieve that, interest rates may have to remain at peak levels for some time, and recession in the UK and eurozone is a certainty,” he added. “The U.S. looks set to have the shallowest downturn, but may still record a recession.”
The Dow Jones Industrial Average fell 482 points, or 1.4%, to 33,947, while the S&P 500 lost 1.8% and the tech-focused Nasdaq dropped 1.9%.
Global oil prices moved higher Monday after OPEC leaders, as well as key allies including Russia, agreed to maintain their program of production cuts until at least the end of next year.
The cartel, which concluded a virtual meeting late Sunday, made no changes to their October agreement, which pulled 2 million barrels from the market each day amid worries over global demand linked to recession risks.
The moves followed a late Friday decision by the leaders of the G-7, along with Australia, to agree a cap on the price of imported Russian crude at $60 a barre, but were partly offset by optimism linked to China’s moderately improving Covid situation, which could stoke demand in the world’s biggest energy market.
A weaker dollar, however, pushed priced into the red by Monday afternoon, with Brent crude futures for February delivery, the global pricing benchmark, falling $2.56 on the session at $83.01 per barrel. WTI contracts for January, which are tightly-linked to U.S. gasoline prices, were marked $2.62 lower at $77.34 per barrel.