US stocks, dollar power higher on 'slow and steady' rate hopes

After initially sagging, European shares (.STOXX) rose 0.5, even as euro zone inflation numbers justified what is widely expected to be another 50 basis-point hike in the European Central Bank's already decade-high rates this month.

Consumer price inflation in the 20 countries sharing the euro currency barely eased to 8.5% in February from 8.6% in January on lower energy prices, above the 8.2% economists polled by Reuters had expected.

MSCI's broadest index of world shares (.MIWD00000PUS) gained 0.37%.

Stock and bond markets in recent weeks have been driven by different factors, said Kevin Gardiner, global investment strategist at Rothschild & Co. The chief concern in stocks is the expectation of pressured corporate profits, while bonds are sensitive to inflation and rate expectations.

"The economic impact of tightening remains a puzzle. Profitability might not be that fragile, at least, not yet," he said.

Overnight, both benchmark government bonds and shares had taken a blow, as inflation indicators from Germany and the United States reinforced expectations interest rates would go higher and stay there for longer.

Germany's 2-year government bond yield rose to its highest since October 2008.

In the United States, manufacturing activity contracted for a fourth straight month in February, but a gauge of prices for raw materials increased last month, stoking concerns that inflation would remain stubborn.

"Economic data has surprised to the upside," said Steven Oh, global head of credit and fixed income at PineBridge Investments. Any unexpected result in the data would drive policymakers to be more aggressive, and that has reset market expectations, he said.

PRESSURE POINTS

U.S. government bond yields marched higher. Benchmark 10-year Treasury yields were near a four-month high at 4.066%, while two-year yields also advanced to 4.889%, around a fresh 16-year high.

Fed funds futures tied to the Fed's policy rate see about an even chance that the rate will range from 5.5%-5.75% by September, from the current range of 4.5%-4.75%.

"We expect interest rates to stay higher for longer, and we expect stock market volatility ahead," strategists at the Wells Fargo Investment Institute wrote on Thursday, adding that stronger-than-expected economic data this winter pushed their recession outlook into the second half of 2023.

DOLLAR REBOUND CONTINUES

In currency markets, the U.S. dollar to $104.968. The index is now up about 1.4% for the year, but still down from a September high around $114.

The euro lost 0.65% and the pound dropped 0.67%, with hotter-than-expected inflation numbers adding pressure on the ECB to raise rates.

In the crypto world, shares of Silvergate Capital (SI.N) plunged 57% after the cryptocurrency-focused bank said it was delaying its annual report and evaluating its ability to operate as a going concern. Bitcoin was last down about 0.5% at $23,461.

Oil prices ticked up, boosted by signs of a strong economic rebound in top crude importer China and easing worries of aggressive U.S. rate hikes. U.S. crude rose 0.32% to $77.94 per barrel and Brent was at $84.50, up 0.23% on the day.

Spot gold was slightly lower at $1,836 per ounce.