By Karen Brettell
July 31 (Reuters) - Stocks were mixed on Friday, giving back much of their earlier gains, while longer-dated Treasury yields pushed to new multi-year highs, after several Federal Reserve officials argued that further interest rate hikes are needed to combat inflation.
Currency markets also stayed on alert for further intervention, a day after Japanese authorities stepped in to support the yen, according to a market source.
Three Fed policymakers who had dissented in favor of a rate
hike at this week's meeting made their case publicly on Friday for higher rates. The Fed kept rates unchanged — a widely expected outcome that aligned with market pricing, which had priced in roughly a one-in-three chance of a hike.
Dallas Federal Reserve President Lorie Logan said on Friday that without "modest action in the near term," the U.S. central bank will not be able to get inflation back on track to its 2% target, given a solid labor market that is strengthening and upside risks to price pressures.
That echoed similar comments by Cleveland Fed President Beth Hammack and Minneapolis Fed President Neel Kashkari.
The yield on benchmark U.S. 10-year notes rose 6.35 basis points to 4.727%, the highest since January 2025.
The 30-year bond yield rose 5.14 basis points to 5.2584%, the highest since mid-2007.
Traders are now pricing in 69% odds of a rate increase at the Fed's September meeting.
Oil prices sharply on Friday as reports that some tankers were forced to turn around in the Strait of Hormuz prompted traders to reassess shipping flows through the key waterway.
Oil prices rose sharply in July, with Brent crude headed for monthly gains for the first time since March. [O/R]
"The shock absorbers in oil markets are dwindling fast, so a failure to de-escalate would be materially costlier than previous rounds of tension," wrote Teddy Bunzel, head of Lazard Geopolitical Advisory at Lazard Asset Management.
Shipments through the crucial Strait of Hormuz remain disrupted. The alternative route through the Bab el-Mandeb Strait has also come under attack from the Iranian-backed Houthis, further worsening the outlook.
STOCKS GIVE BACK EARLIER STRENGTH
Stocks had rallied earlier in the session after strong earnings from Amazon and Microsoft eased investor jitters and drew traders back into the AI trade, but hawkish Fed commentary and rising yields eroded those gains.
Microsoft on Wednesday forecast strong cash generation through fiscal 2027. Amazon followed a day later with its strongest cloud growth in more than four years, reassuring investors eager for proof that massive AI spending is paying off.
"There's significant drawdowns over the course of the month and everything related to artificial intelligence," said Art Hogan, chief market strategist at B Riley Wealth.
"Now with the hyperscalers, in particular Amazon, coming out and talking about the amount of revenue and demand for their cloud services, which in general is a lot of the small and medium businesses, that's put a significant interest back into the neo-cloud companies and their offerings as it pertains to rollout of AI strategies.”
The Dow Jones Industrial Average was last down 0.06% at 52,179.23, the S&P 500 fell 0.02% to 7,435.72 and the Nasdaq Composite rose 0.19% to 25,170.38.
The pan-European STOXX 600 index fell 0.03%, while Europe's broad FTSEurofirst 300 index also dipped 0.03%.
South Korea's battered KOSPI leapt 17.91%, mounting a record comeback after heavy losses earlier this week. The tech-heavy bourse, still about 30% off its all-time high, has become emblematic of the sharp swings in investor sentiment towards AI-related stocks.
MSCI's gauge of stocks across the globe was up 0.73% at 1,115.07.
BOJ HOLDS RATES DAY AFTER INTERVENTION
The yen strengthened 0.03% against the greenback to 159.49 per dollar, following sharp gains on Thursday after Japan conducted yen-buying, dollar-selling intervention, according to a market source. The U.S. Treasury has also told several banks it may intervene in the yen market on Friday and that they should "stand ready for future action," a source familiar with the matter told Reuters.
The BOJ kept interest rates unchanged on Friday, but signalled its resolve to push up borrowing costs.
At a press conference, BOJ Governor Kazuo Ueda said inflation risks were skewed to the upside, and the central bank was prepared to speed up the pace of rate hikes should monetary conditions be accommodative.
Analysts note that intervention has had limited success in providing durable support for the yen, and say the currency's outlook is unlikely to improve unless the BOJ raises rates.
"The yen fundamentals and technicals are very poor. Intervention is not a credible, long-term solution," said Lauren van Biljon, senior portfolio manager, rates and FX, at Allspring Global Investments.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.21% to 100.28, with the euro down 0.36% at $1.1485.
Spot gold fell 1.52% to $4,040.70 an ounce.
(Reporting by Karen Brettell; Additional reporting by Niket Nishant, Sudeshna Ghoshal and Rae Wee; Editing by Susan Fenton)
