Wall Street drops, Treasury yields gyrate on Fed Chairman Powell's remarks

By Stephen Culp

NEW YORK (Reuters) - U.S. stocks retreated and benchmark Treasury yields wavered on Tuesday as Federal Reserve Chairman Jerome Powell commenced his semi-annual, two-day monetary policy testimony before Congress.

All three major U.S. stock indexes were languid in early trading before Powell's prepared remarks were released as he sat down to testify before the Senate Banking Committee.

But they headed sharply lower and Treasury yields reversed an early dip after Powell struck a more hawkish tone than investors expected, stoking speculation the central bank could raise interest rates higher - and keep them there longer - than market participants might have anticipated.

"(Powell is) stating the obvious - inflation is stubbornly high," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York. "He's very clear that the Fed is going do what it takes to bring core inflation down to its 2% target and they're sticking to that."

 

Inflation reuters.com/graphics/USA-STOCKS/myvmoaydzvr/inflation.png

 

"The market will focus on moderating inflation one day and the risk of recession on another day," Ghriskey added. "That results in a lot of volatility."

The Dow Jones Industrial Average fell 179.49 points, or 0.54%, to 33,251.95, the S&P 500 lost 24.89 points, or 0.61%, to 4,023.53 and the Nasdaq Composite dropped 45.46 points, or 0.39%, to 11,630.28.

European shares extended their losses after Powell's prepared remarks.

"The world is concerned that the Fed hikes rates so much and so long that the U.S. could head into recession," Ghriskey said.

The pan-European STOXX 600 index lost 0.60% and MSCI's gauge of stocks across the globe shed 0.72%.

Emerging market stocks lost 0.65%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.6% lower, while Japan's Nikkei rose 0.25%.

Benchmark Treasury yields initially headed higher after Powell's remarks were released but eased as his testimony began in earnest.

Benchmark 10-year notes last rose 2/32 in price to yield 3.9754%, from 3.983% late on Monday.

The 30-year bond last rose 10/32 in price to yield 3.8932%, from 3.912% late on Monday.

The greenback gained ground against a basket of world currencies as Powell indicated the Fed would stay the course in its efforts to rein in inflation.

The dollar index rose 0.74%, with the euro down 0.72% to $1.0601.

The Japanese yen weakened 0.54% versus the greenback at 136.69 per dollar, while sterling was last trading at $1.1894, down 1.06% on the day.

Oil prices extended their losses on worries over dampening demand.

U.S. crude fell 1.37% to $79.36 per barrel and Brent was last at $85.23, down 1.1% on the day.

Gold plunged as central bank hawkishness stoked fears of higher interest rates.

Spot gold dropped 1.4% to $1,821.99 an ounce.

 

(Reporting by Stephen Culp Additional reporting by Amanda Cooper in London; Editing by Mark Potter)