U.S. stocks closed firmly lower Wednesday, while the dollar drifted south and Treasury yields retreated, as investors reset prices in bond and currency markets following an unexpected policy move by the Bank of Japan and reacted to a disappointing reading on December retail sales.
Headline sales, in fact, slumped 1.1% to a collective $677.1 billion, the Commerce Department said, thanks to a pullback in gas prices and slump in automobile sales, as consumer continue to pare spending amid elevated inflation and an uncertain job market.
The tally, while not adjusted for inflation, is likely to indicate a cooling of economic growth that could influence the Fed's thinking on interest rates while not adding to consumer price pressures heading into the start of the year.
A slower-than-expected reading for December factory gate inflation, which fell the most since the start of the Covid pandemic in 2020, added to the broader rate market optimism. The Labor Department's Producer Price Index fell 0.5% in December, the most in 18 months, with the annualized rate pegged at 6.2%.
The data followed a major overnight rally for bond markets in major markets around the world overnight after the Bank of Japan declined to make any changes to its ultra-loose monetary policy, keeping rates near zero percent and maintaining the recently-altered trading bands in Japanese government bonds.
The decision, one of the final policy unveilings of Governor Haruhiko Kuroda, caught markets off-guard and triggered a wave of bond buying, with Japanese government bond yields falling the most in two decades and the yen sliding to a multi-week low against the dollar.
"The market was leaning for further policy tightening from the Bank of Japan after December’s surprise widening of the yield-curve-control 'band', but the Bank of Japan failed to deliver, leading to the yen getting shocked back lower, in part on the unwinding of the largest spike in implied volatility for overnight options over the event in years," wrote Saxo Bank strategists.
"BoJ Governor Kuroda said that the sustainable inflation goal is not yet in sight, suggesting low odds that he will declare victory on bringing back inflation before his exit in April," Saxo added.
Benchmark 10-year Treasury note yields slumped 13 basis points to 3.375% in New York trading, while 2-year notes were pegged at 4.081% in the wake of the global rally.
The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.05% lower at 102.379 and trading near the lowest levels in seven months.
The moves haven't, as yet, provided a spark for U.S. equity futures, however, with investors looking to today's reading of December retail sales and fourth quarter earnings from Procter & Gamble (PG) and Netflix (NFLX) later in the week.
Markets are also likely to focus on a trio of speakers from the Federal Reserve today, with Dallas Fed President Lorie Logan, Philadelphia Fed President Patrick Harker and Dallas Fed President Raphael Bostic all set to make public appearances ahead of the central bank's January 31 policy meeting in Washington.
The CME Group's FedWatch is indicating a 95.3% chance of a 25 basis point rate hike from the Fed on February 1, up from around 76.7% this time last week, with traders expecting the Fed Funds rate to peak at a range of between 4.75% and 5% in the early spring.
On Wall Street, the S&P 500 closed 63 points lower, or 1.56%, while the Dow Jones Industrial Average fell 614 points, or 1.8%. The tech-focused Nasdaq was down 138 points, or 1.24%, helped in part by a pull back in Treasury bond yields.
In terms of individual stocks, United Airlines (UAL) shares fell 4.57% after the carrier posted stronger-than-expected fourth quarter earnings and forecast Street-beating profits for the coming year.
Microsoft (MSFT) shares were marked 1.9% lower after the tech and cloud giant unveiled plans to cut 10,000 jobs, or 5% of its global workforce, and take a $1.2 billion charge to its second quarter earnings.
Moderna (MRNA) shares, meanwhile, surged 3.32% after the drugmaker unveiled positive data from a late stage trial of its developing respiratory syncytial virus treatment after the close of trading on Tuesday.
Albertsons (ACI) shares were also active, falling 1.18% after a court in Washington state approved the grocer's plans to pay a $4 billion dividend ahead of its proposed $25 billion tie-up with Kroger (KR).
In overseas markets, the the region-wide MSCI ex-Japan index gained 0.26% into the close of trading, while Tokyo's Nikkei 225 surged 2.5%, to the highest close since December 19, as the yen retreated following the Bank of Japan's surprise policy stance.
Europe's Stoxx 600 closed 0.23% higher in Frankfurt dealing as the regional benchmark extended its recent run of gains to a sixth consecutive session, the longest winning streak since November of 2021.
