By Herbert Lash
NEW YORK (Reuters) - The dollar rose and Treasury yields jumped on Wednesday ahead of a speech in two days by Federal Reserve Chair Jerome Powell that may affirm the U.S. central bank's aggressive policy to tame inflation or signal a "pivot" to subdued interest rate hikes.
U.S. and European shares gained in choppy trade as investors tried to divine whether the Fed was more likely to slow rate hikes or stay aggressive until it brings inflation down to its target of 2%.
Yields on both German and U.S. benchmark 10-year notes rose to eight-week highs. British short-dated government bond yields hit 14-year highs. Soaring energy prices in Europe raised fears of more inflation in Germany and Britain.
The yield on 10-year U.S. Treasuries rose further above 3%, hitting 3.126%, suggesting for some the rebound in stocks may be short-lived. The German 10-year bund rose to 1.388%, and two-year UK gilts hit 2.955%.
"When the 10-year climbs above 3%, all of a sudden stocks have a harder time. We saw that in May, we saw that in June, we're seeing it again now," said Anthony Saglimbene, chief market strategist at Ameriprise Financial (NYSE:AMP) in Troy, Michigan.
"That will be a headwind, as long as the 10-year remains above 3%," he said of the benchmark Treasury note.
Bets in recent days on how much the Fed will raise rates at its September policy meeting have whipsawed between 50 to 75 basis points.
Traders of fed funds futures last priced in a 60.5% chance that the Fed will raise rates by 75 basis points next month, and a 39.5% probability of a 50-basis point increase.
"The market is gyrating between this ultra, ultra hawkish view and this ultra, ultra dovish view" of the banking symposium in Jackson Hole, Wyoming on Friday, Saglimbene said. "It's going to be somewhere in the middle."
The Dow Jones Industrial Average closed up 0.18%, the S&P 500 gained 0.29% and the Nasdaq Composite advanced 0.41%. All 11 S&P 500 sectors rose, as did small cap stocks.
In Europe, the pan-regional STOXX 600 index closed up 0.16% and MSCI's gauge of stocks across the globe was essentially flat, up 0.02%.
The euro fell to a two-decade low before edging up 0.05% to $0.9972. The dollar index rose 0.037%.
For portfolio managers awaiting Powell's commentary, everything else is merely speculation, said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.
"The (stock) market is trading around on not much other than sentiment and the fact that we got pretty overbought and kind of due for a pullback," he said. "Now we're bouncing a little bit, positioning into the Fed chair's commentary at Jackson Hole."
Economic data showed new orders for U.S.-made capital goods increased in July, but the pace slowed from June, suggesting business spending on equipment could struggle to rebound after contracting in the second quarter.
Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.4% last month, the Commerce Department said on Wednesday. These so-called core capital goods orders surged 0.9% in June.
Oil prices rose in volatile trading on concerns that the United States will not consider additional concessions to Iran in its response to a draft agreement that would restore Tehran's nuclear deal and potentially crude exports by that member of the Organization of Petroleum Exporting Countries.
Benchmark Brent crude retreated after rising above $100 a barrel. Saudi Arabia has suggested that OPEC and its allies may consider cutting output, though bearish economic signals from central bankers are weighing.
U.S. crude futures settled up $1.15 at $94.89 a barrel and Brent rose $1.00 to $101.22.
U.S. gold futures settled unchanged at $1,761.50 an ounce.