US stocks decline, Treasury yield gain as solid data dims rate cut hopes

Wall Street extended its sell-off on Tuesday and the benchmark U.S. Treasury yield rose to its highest level in more than a month as robust economic data reduced the impetus for the Federal Reserve to begin cutting its policy rate as early as March.

All three major U.S. indexes were lower, with interest rate sensitive momentum stocks weighing heaviest on the tech-heavy Nasdaq.

U.S. Treasury yields built on recent gains.

The Commerce Department's December retail sales report painted a portrait of a healthy consumer - responsible for about 70% of the U.S. economy - who has been able to weather the dual storms of hot inflation and restrictive monetary policy.

"Today is a continuation of yesterday bond yields have moved higher again and that's partly due to Fed expectations," said Bill Merz head of Capital Market Research at U.S. Bank Wealth Management, MN. "Today we're seeing lower odds of a March rate hike."

Indeed, at last glance, financial markets are pricing in a 55.7% likelihood of the Fed cutting its key policy rate by 25 basis points in March, down from 63.l% on Tuesday, according to CME's FedWatch tool.

The Dow Jones Industrial Average fell 26.79 points, or 0.07%, to 37,334.33, the S&P 500 lost 28.28 points, or 0.59%, to 4,737.7 and the Nasdaq Composite dropped 163.08 points, or 1.09%, to 14,781.27.

European shares were sharply lower, extending their previous session's decline as more hawkish commentary from European Central Bank (ECB) officials dampened rate cut hopes.

"Central banks have been the primary focus of investors," Merz added. "The impact ... can't be emphasized enough."

The pan-European STOXX 600 index lost 1.33% and MSCI's gauge of stocks across the globe shed 1.03%.

Emerging market stocks lost 2.24%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 2.38% lower, while Japan's Nikkei lost 0.40%.

U.S. Treasury yields were pressured higher by the stronger-than-expected retail sales print combined with an unexpected rise in UK inflation.

Benchmark 10-year notes last fell 11/32 in price to yield 4.1076%, from 4.066% late on Tuesday.

The 30-year bond last fell 10/32 in price to yield 4.3214%, from 4.305% late on Tuesday.

The dollar advanced against a basket of world currencies as global monetary policymakers argued against rate cuts, and soft economic data from China supported the safe haven currency.

The dollar index rose 0.18%, with the euro down 0.23% to $1.0849.

The Japanese yen weakened 0.85% versus the greenback at 148.49 per dollar, while sterling was last trading at $1.2652, up 0.13% on the day.

Crude prices softened due to demand worries on the heels of China's shakier-than-expected GDP report.

U.S. crude oil fell 0.88% to $71.76 per barrel and Brent was last at $77.22, down 1.37% on the day.

Gold prices fell for the second straight session in opposition to the dollar's advance, as hawkish remarks from Fed Governor Christopher Waller on Tuesday dimmed chances of a March rate cut.

Spot gold dropped 0.9% to $2,009.60 an ounce.