The market has whipsawed over the last week, feeling the aftereffects of the Fed's surprise projection last week for rate increases as soon as 2023, which knocked stocks, boosted the dollar and led to the flattening of the U.S. bond yield curve.
The dollar ended higher, reversing earlier losses on Wednesday as two Fed officials said that a period of high inflation in the United States could last longer than anticipated, a day after Fed Chair Jerome Powell played down rising price pressures.
Powell on Tuesday reassured markets by saying the central bank will watch a broad set of job market data to assess the economic recovery from COVID-19, rather than rush to raise rates on the basis of fear of inflation.
Ten-year Treasury yields inched higher but remained below 1.5% in muted trading. [US/]
Strong manufacturing data and a rally in Tesla Inc lifted the Nasdaq, which gained 0.13 percent. The Dow Jones Industrial Average fell 0.21 percent and the S&P 500 lost 0.11 percent.
"The market is caught between not knowing what to believe about the coming few quarters, whether a slowdown will emerge," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. "We're going back and forth depending on thoughts about interest rates and whether they are going to need to go up faster than expected or not."
Flash U.S. manufacturing PMI climbed to a record high in June, supporting Wall Street shares in early trade. But manufacturers are still struggling to secure raw materials and qualified workers, substantially raising prices for both businesses and consumers.
Sales of new U.S. single-family homes fell to a one-year low in May, likely hindered by expensive raw materials such as lumber, which are boosting the prices of newly built homes.
"The biggest debate in the market is if inflation is transitory or permanent," said JJ Kinahan, chief market strategist with TD Ameritrade. "I would expect this pattern of trading without great conviction to continue with quick adjustments until earnings start."
The 10-year U.S. Treasury yield stood at 1.4869%. [US/]
The MSCI world equity index rose 0.1%, continuing to climb from the one-month low it hit in the aftermath of the Fed's meeting.
The STOXX 600 was 0.73% lower on the day and the euro retreated 0.1%.
Early PMI data showed that euro zone business growth accelerated at its fastest pace in 15 years in June as the easing of more lockdown measures and the unleashing of pent-up demand drove a boom in the bloc's dominant services industry.
Germany's private-sector growth was also lifted to its highest level in more than a decade in June, the PMI survey showed. In France, business activity edged higher, but not as much as expected.
In Britain, growth in the private sector cooled slightly from the all-time high hit in May, but inflation pressures faced by firms hit record levels. The Bank of England meets on Thursday.
Berenberg economists Holger Schmieding and Kallum Pickering wrote in a note to clients that the euro zone economy is likely to recover to its pre-pandemic level of GDP in Q4 2021, while for Britain it will be Q1 2022.
UBP's Kazmi said that he is positioned for higher yields in Europe, as it overtakes the United States in terms of vaccinations, lockdown easing and economic recovery from COVID-19.
"It will be interesting to see if the German Bund can follow the U.S. rate move with yields moving higher in Europe - it is something that we think could happen," he said.
"The fact that the Fed has moved more hawkishly will allow the ECB to be more comfortable perhaps in moving more hawkish, or less dovish, over time."
Germany's benchmark Bund yield traded at -0.176%.
Oil prices jumped to their highest in more than two years after an industry report on U.S. crude inventories reinforced views of a tightening market as travel picks up in Europe and North America. [O/R]
"We're all starting to drive more," Tuz said.
Brent crude futures were up 0.71 percent at $75.34 a barrel and U.S. crude gained 0.62 percent to trade at $73.3 per barrel.
Rising oil prices supported the Colombian and Mexican pesos as the dollar extended losses following reassurances that the Fed would not rush into policy tightening.
The Chilean peso led gains among its Latin American counterparts after minutes from the country's latest central bank meeting showed policymakers considered raising the benchmark interest rate.
Spot gold prices fell 0.07%, reversing earlier gains. Gold futures settled up 0.3% at $1,783.40, buoyed by Powell's reassurances. [GOL/]
Bitcoin rose around 2.1%, giving back some of the day's steeper gains. The cryptocurrency dropped to as low as $28,600 on Tuesday - its lowest since January. Ether gained 3.3%.
(Reporting by Chris Prentice and Elizabeth Howcroft; Editing by Emelia Sithole-Matarise, Angus MacSwan, Jonathan Oatis and Jane Merriman)
By Chris Prentice and Elizabeth Howcroft