Stocks ended lower Tuesday, while the dollar gave back gains against its global peers and Treasury yields stabilized, as investors continue to worry that inflation risks remain imbedded in the domestic economy.
Monday's stronger-than-expected reading of the ISM non-manufacturing index for November, a benchmark of activity in the biggest and most important driver of growth in the U.S. economy, surprised markets and triggered the biggest rally in the dollar in more than two weeks as traders bet the data may induce a longer, and more hawkish stance on rate hikes from the Federal Reserve.
The CME Group's FedWatch still suggests a 79.4% chance of a 50 basis point rate hike from the Fed next week, but bets on follow-on moves of similar size are starting to take shape, testing the market's theory that the terminal Fed Funds rate will be pegged at around 5% to 5.25% in the early spring.
The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.27% higher in late New York trading at 105.57, following on from yesterday's sharp rally triggered by the ISM data. Their moves were tempered, however, by another overnight rate hike by the Reserve Bank of Australia -- its eighth of the year -- which lifted its benchmark cash rate to 3.1%.
Benchmark 10-year Treasury note yields slipped to 3.53% in New York trading, consolidating yesterday's gains, while 2-year notes were pegged at 4.366%.
JPMorgan CEO Jamie Dimon told CNBC at the Business Roundtable event in New York Tuesday that the Fed is likely to hold its terminal rate at 5% for between three to six months, but noted that it might not be long enough to tame inflation.
He also noted that a 'mild to hard" recession could hit the U.S. economy next year, even as he touted the strength of consumer spending, warning that "inflation could erode all that."
Further Covid easing in China, including moves to eliminate negative testing requirements to travel on public transport in the capital city of Beijing, failed to support stocks in the Asia session as markets reacted to last night's slump on Wall Street.
The region-wide MSCI ex-Japan index was marked 1.17% lower, its biggest decline in nearly two weeks, while Europe's Stoxx 600 closed 0.6% lower in Frankfurt.
On Wall Street, the Dow Jones Industrial Average ended down 351 points, or 1.03%, to 33,596, while the S&P 500 lost 1.44%, and he tech-heavy Nasdaq dropped 2%
Chip stocks were active in early Tuesday trading as reports suggest Taiwan Semiconductor (TSM), the world's biggest contract chipmaker, is set to unveil plans for a second manufacturing site in Arizona Tuesday, taking its overall U.S. investment to more than $40 billion.
TSMC, as it is often known, will host President Joe Biden at its plant in Phoenix later today as moves towards making the $12 billion facility fully operational by 2024.
The company is also set to unveil plans for a second plant, which will begin producing higher-end chips in 2026, at today's event. Nvidia (NVDA) CEO Jensen Huang, who will attend the event along with Apple's (AAPL) Tim Cook and Micron's (MU) Sanjay Mehrotra, called TSMC's investment a "game-changing development for the industry".
Nvidia shares were marked 3.75% at $159.87 each while Micron nudged 0.67% lower to $53.68 each.
Markets will also be tracking exit polls from the runoff Senate race in Georgia, where Democrat Raphael Warnock holds a narrow lead over his Republican rival Herschel Walker.
A Democratic win would boost the party's control of the Senate to two seats, eliminating at least in part the need to tweak legislation in order to placate conservative Senators such as Joe Manchin of West Virginia and Kyrsten Sinema of Arizona.
