Wall Street retreats after Powell rally with dollar falling

By Sinéad Carew and Marc Jones

NEW YORK/LONDON (Reuters) - Wall Street equities fell on Thursday as investors digested economic data after a big rally in the previous session from signals the U.S. Federal Reserve would slow its interest rate hiking pace.

The U.S. dollar fell to its lowest level since August and Treasury yields sank after Fed Chair Jerome Powell said on Wednesday that it was time to slow rate hikes. He also signalled a protracted economic adjustment to higher borrowing costs and inflation only slowly coming down. He also pointed to a chronic shortage of workers in the United States.

Oil rose on Thursday on the chance of further supply cuts by OPEC+ and as easing COVID curbs in China raised the likelihood of higher demand from the world's top crude importer.

While equity investors cheered signs of moderating inflation and an increase in U.S. consumer spending in October, risk appetites dimmed after data showed U.S. manufacturing activity contracted for the first time in 2-1/2 years in November as higher borrowing costs weighed on demand for goods.

Still investors saw easing inflation supporting the Fed chair's indication that rate hikes could slow. In the 12 months through October, the personal consumption expenditures (PCE) price index increased 6.0% after advancing 6.3% in September compared with the Fed's 2% target.

"If inflation keeps coming down, then markets will keep running higher, as investors will conclude that the Fed won’t need to raise rates as high, or keep them high for as long, as previously expected," wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance in Charlotte, North Carolina.

The Dow Jones Industrial Average fell 284.6 points, or 0.82%, to 34,305.17, the S&P 500 lost 2.01 points, or 0.05%, to 4,078.1 and the Nasdaq Composite added 20.63 points, or 0.18%, to 11,488.63.

The S&P had rallied 3% on Wednesday after Powell's comments while Nasdaq had gained more than 4% and the Dow had risen 2%.

The pan-European STOXX 600 index rose 0.95% and MSCI's gauge of stocks across the globe gained 0.76%. Emerging market stocks rose 0.59%.

In currencies, the dollar index fell 0.756%, with the euro up 0.79% to $1.0487.

The Japanese yen strengthened 1.57% versus the greenback at 135.92 per dollar, while Sterling was last trading at $1.2264, up 1.73% on the day.

In bonds trading, moderating inflation in October initially pushed U.S. Treasury yields further down following Wednesday's drop.

Benchmark 10-year notes were down 10.7 basis points to 3.594%, from 3.701% late on Wednesday. The 30-year bond was last down 11 basis points to yield 3.7132%, from 3.823%. The 2-year note was last was down 5.4 basis points to yield 4.3181%, from 4.372%.

Graphic: Stocks rebound https://fingfx.thomsonreuters.com/gfx/mkt/lgpdkwbxkvo/Pasted%20image%201669900096733.png

CHINA REOPENING

Allied with fresh signs that China is looking to relax COVID restrictions, Asian stocks had closed up 1.36%.

China's factory activity shrank in November as widespread curbs disrupted manufacturers' output, a private sector survey showed on Thursday, weighing on employment and economic growth in the third quarter.

Oil prices rose ahead of the Dec. 4 meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, a group known as OPEC+. Though sources had said on Wednesday that policy change is unlikely, some feel that a further cut cannot be ruled out.

U.S. crude recently rose 2.84% to $82.84 per barrel and Brent was at $88.86, up 2.17% on the day.

Spot gold added 1.7% to $1,798.17 an ounce. U.S. gold futures gained 2.83% to $1,795.40 an ounce.

(Reporting by Sinéad Carew in New York, Marc Jones, Samuel Indyk and Alun Jogn in London; Editing by Nick Macfie and Lisa Shumaker)