By Chuck Mikolajczak

NEW YORK (Reuters) – U.S. stocks dropped for a third straight session and suffered a second straight week of losses on Friday as fears continued to mount that the Federal Reserve’s campaign to arrest inflation would tilt the economy into a recession.

Equities have been staggered since the U.S. central bank’s decision to raise interest rates by 50 basis points (bps), as expected. But comments from Fed Chair Jerome Powell signaled more policy tightening, and the central bank projected that interest rates would top the 5% mark in 2023, a level not seen since 2007.

Further comments from other Fed officials fueled the concern. New York Fed President John Williams said on Friday it remains possible the U.S. central bank will raise rates more than it expects next year. The policymaker added that he does not anticipate a recession due to the Fed’s aggressive tightening.

In addition, San Francisco Federal Reserve Bank President Mary Daly said it is “reasonable” to believe that once the Fed’s policy rates reached their peak, they could stay there into 2024.

“It feels as if finally the market is starting to understand that bad news is bad news, and that is what is starting to occur. Since the October bottoms, the market has continued to price in what I would consider a substantial amount of optimism at the fact the Fed could navigate and pilot a successful soft landing,” said Dave Wagner, equity analyst and portfolio manager for Aptus Capital Advisors in Cincinnati.

“Finally, the market is taking into consideration that bad news should mean bad things for the market.”

The Dow Jones Industrial Average fell 281.76 points, or 0.85%, to 32,920.46; the S&P 500 lost 43.39 points, or 1.11%, to 3,852.36; and the Nasdaq Composite dropped 105.11 points, or 0.97%, to 10,705.41.

For the week, the Dow lost 1.66%, the S&P fell 2.09% and the Nasdaq declined 2.72%.

Money market bets show at least two 25 bps rate hikes next year and a terminal rate of about 4.8% by midyear, before falling to around 4.4% by the end of 2023.

On the economic front, a report showed U.S. business activity contracted further in December as new orders slumped to their lowest level in just over 2-1/2 years, although easing demand helped cool inflation.

The tech-heavy Nasdaq on Thursday closed below its 50-day moving average, a key technical level seen as sign of momentum. On Friday, the S&P also closed below its 50-day moving average.

The prospects of a “Santa Claus rally”, or year-end uptick, in markets this year have dimmed, as the majority of global central banks have adopted tightening policies. The Bank of England and the European Central Bank were the most recent to indicate an extended rate-hike cycle on Thursday.

Markets pared losses in the last hour of trading, however, possibly due in part to the simultaneous expiration of stock options, stock index futures and index options contracts, known as triple witching, which can exacerbate market volatility.

Each of the 11 major S&P 500 sector indexes were in the red, led lower by a drop of more than 2.96% in real estate stocks.

Meta Platforms Inc advanced 2.82% after J.P. Morgan upgraded the stock to “overweight” from “neutral,” while Adobe Inc gained 2.99% after the Photoshop maker forecast first-quarter profit above expectations.

Exact Sciences Corp surged 16.39% after rival Guardant Health Inc’s cancer test missed expectations, while General Motors Co lost 3.91% after its robotaxi unit Cruise faced a safety probe by U.S. auto safety regulators.

Volume on U.S. exchanges was 17.28 billion shares, compared with the x.xx billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancing ones on the NYSE by a 2.47-to-1 ratio; on Nasdaq, a 1.66-to-1 ratio favored decliners.

The S&P 500 posted one new 52-week high and 18 new lows; the Nasdaq Composite recorded 79 new highs and 392 new lows.

(Reporting by Chuck Mikolajczak; editing by Jonathan Oatis)

By Valentine Hilaire

MEXICO CITY (Reuters) -Canada-based miner First Quantum Minerals said on Friday it is going through “all available legal means” after the Panamanian government ordered it to pause operations at its flagship copper mine over a payments dispute.

The Cobre Panama mine is considered the largest private investment in the Central American country, accounting for roughly 3.5% of its gross domestic product.

Panama’s government had on Thursday ordered First Quantum to pause operations after it missed a deadline to finalize a deal that would have increased annual payments to the government to at least $375 million.

Ebrahim Asvat, a lawyer negotiating on behalf of the Panamanian government, told Reuters in a phone interview that First Quantum’s team had, at the last minute, sent them an “entirely different contract” in which payments did not add up to the previously agreed-upon sum.

A spokesman for First Quantum said taxes and royalties paid to the government would provide the $375 million per year.

“We are open to continue talking, but it depends on (First Quantum),” said Asvat. “What the state is not going to allow is for the mine to become a colonial enclave, with First Quantum thinking that they are the owners of that piece of land.”

First Quantum reported revenue from Cobre Panama of $2.29 billion in the first nine months of this year. It shares the joint venture with the Korea Panama Mining Corporation (KPMC), which holds a 20% stake.

Mainly focused on copper, First Quantum also mines nickel, zinc and cobalt in projects across South America, Africa, Europe and Australia.

Earlier on Friday, First Quantum said in a statement it was disappointed by the “unnecessary actions” taken by the government and that the two parties “came very close to an agreement.”

Asvat said operations were still ongoing as the suspension order had yet to take effect.

Shares of First Quantum have lost more than 15% of their value since closing on Wednesday. Analysts at Jefferies cut their target price due to “the risk of a more catastrophic outcome.”

Jefferies said the most likely outcome, however, would be for negotiations to be extended and the two sides to agree on new terms.

The Panamanian government hired financial advisers to explore alternatives with other firms in recent months, according to a source familiar with the matter.

(Reporting by Valentine Hilaire in Mexico CityWriting by Sarah MorlandEditing by Barbara Lewis and Matthew Lewis)

By Hannah Lang

WASHINGTON (Reuters) -The U.S. Federal Reserve and the Federal Deposit Insurance Corp identified problems in the so-called living wills of Credit Suisse Group AG and BNP Paribas SA detailing how the banks’ U.S. operations would be unwound in the event of bankruptcy.

The regulators identified deficiencies in Credit Suisse’s U.S. governance and cash flow forecasting, according to a statement on Friday. The inadequacies raised questions about the bank’s commitment to executing its resolution strategy, they said.

The Fed and FDIC were unable to assess the feasibility of Credit Suisse’s plan because it lacked detail and necessary information, they said. The weaknesses also indicate a “lack of appropriate internal review and coordination” before the plan was submitted. The regulators gave Credit Suisse a deadline of May 2023 to resubmit its plan to address governance weaknesses, and said the bank must demonstrate that its cash flow forecasting is fixed in its next resolution plan, which is due by July 2024.

Credit Suisse said it is committed to addressing the issues.

“The bank has taken, and continues to take, significant steps to enhance its resilience, including investments in controls, processes and technology,” the company said.

The deficiencies in its living will add to the many challenges facing Credit Suisse as it continues to bleed billions of francs as wealthy clients turn their backs on the Swiss bank. Credit Suisse is striving to move on from scandals and heavy losses that prompted speculation about its future and led to large withdrawals by customers.

Reuters reported earlier this month that Credit Suisse was accelerating previously announced cost cuts as client outflows and a slowdown in activity weigh on its revenue outlook.

The banking regulators also identified a shortcoming, which is not as severe as a deficiency, in BNP Paribas’ resolution plan relating to its securities repurchase agreement activity.

The Fed and FDIC found that BNP Paribas’ living will did not address feedback on its 2018 plan, which asked the bank to describe how repurchase agreement activity would remain uninterrupted in the event the firm’s U.S. operations failed.

BNP Paribas did not immediately comment.

Last month, the regulators told Citigroup Inc to take urgent action to fix its resolution plan. Problems with the bank’s data governance could adversely affect its ability to produce timely and accurate data during a period of financial stress, the regulators said at the time.

(Reporting by Hannah Lang in Washington, Editing by Lananh Nguyen and Matthew Lewis)

By Michael S. Derby and Ann Saphir

NEW YORK/SAN FRANCISCO (Reuters) -Federal Reserve policymakers may need to lift U.S. borrowing costs above the peak 5.1% they penciled in just this week, and keep them there perhaps into 2024 to squeeze high inflation out of the economy, three of them signaled on Friday.

The hawkish messages, delivered in separate appearances by New York Fed President John Williams, San Francisco Fed President Mary Daly, and Cleveland Fed President Loretta Mester, underscore the U.S. central bank’s determination to do what it takes to ease price pressures that erode wages and strain household budgets, despite what analysts say could be a million or more jobs lost in the process.

They also stand in stark contrast with expectations expressed in financial markets. Traders on Friday leaned into bets that the Fed policy rate will peak below 5% and the Fed will start cutting rates in the second half of 2023 to cushion what the New York Fed’s own internal model suggests will be an economic downturn.

New York Fed chief Williams said he’s not expecting a recession, but told Bloomberg TV “we’re going to have to do what’s necessary” to get inflation back to the Fed’s 2% target, adding that the peak rate “could be higher than what we’ve written down.”

The Fed this year has raised rates from near zero in March to a range of 4.25%-4.5% in the steepest round of rate hikes since the 1980s, the last time it battled fast-rising prices. Inflation by the Fed’s preferred measure is currently running at 6%, three times its 2% target.

Earlier this week as policymakers delivered the latest rate hike they also published projections that signaled nearly all of them see the need to lift rates still further, to at least a 5%-5.25% range, in coming months.

That view surprised investors who earlier in the week had been heartened by data showing a second straight month of cooling inflation that some took to suggest the Fed’s round of rate hikes was near being done.

On Friday, the broad S&P 500 stock-market index closed down about 2% on the week as the Fed’s more hawkish stance sunk in. Bond traders meanwhile appear to be quite convinced the Fed will indeed beat inflation.

Fed policymakers have welcomed inflation’s recent deceleration, driven by easing supply chain problems and higher interest rates restraining the housing market.

But they are also uneasily eyeing the strong labor market as a source of persistent price pressure.

U.S. employers have added hundreds of thousands of jobs each month and the unemployment rate is at a low 3.7%. Workers are in short supply, particularly after millions retired early on in the pandemic, and wage growth is running well beyond what the economy can sustain, policymakers say.

“I don’t quite know why markets are so optimistic about inflation,” San Francisco Fed’s Daly said, adding that it may be because markets are pricing in an ideal scenario. Central bankers, she said, are positioning policy for what she said were still “upside” risks to the inflation outlook.

Central bankers have become increasingly blunt that bringing inflation down will require a labor market slowdown that they will not try to offset with interest-rate cuts until they are confident they have beaten back inflation.

Over the past several rate-hiking cycles, the Fed raised rates and kept them there for an average of 11 months before cutting them.

“I think 11 months is a starting point, is a reasonable starting point. But I’m prepared to do more if more is required,” Daly said, adding that exactly how long will depend on the data. She said her own forecast for rates is in line with the 5.1% peak rate expected by the majority of her colleagues.

The Fed has signaled “ongoing” rate hikes ahead, and Daly’s remarks suggests she sees rates staying high into the first couple of months of 2024 – even as the Fed predicts the unemployment rate will rise to 4.6%, an increase that analysts say could mean the loss of 1.5 million or more jobs.

As of last month, central bank staff economists viewed the risks of recession against continued growth as roughly even, minutes from the Fed’s November policy meeting show.

Meanwhile, on Thursday, the New York Fed said its internal economic model sees a 0.3% decline in overall activity next year and flat growth in 2024, with a return to positive growth the year after.

Fed policymakers this week forecast GDP growing about a half-a-percent next year.

While not a recession per se, such slow growth means an unexpected shock could easily trigger an outright contraction for a couple of quarters, Cleveland Fed’s Mester told Bloomberg TV.

She identified herself as one of seven of the Fed’s 19 Fed policymakers who see rates needing to rise even higher than the 5.1% median in the Fed’s projections published this week.

In his news conference after the end of the Dec. 13-14 policy meeting, Fed Chair Jerome Powell nodded to the challenges that higher unemployment, if not necessarily a recession, would pose.

“I wish there were a completely painless way to restore price stability,” he said. “There isn’t, and this is the best we can do.”

(Reporting by Michael S. Derby and Ann Saphir; Editing by Paul Simao, Andrea Ricci and Alistair Bell)

BEIRUT (Reuters) -A U.S. court of appeals determined this week that cases against Lebanese commercial banks can be tried outside Lebanon, according to a decision seen by Reuters, paving the way for more cases by depositors seeking to unlock their frozen funds.

The court decision, issued on Thursday in a case brought by Lebanese depositors against leading lender Bank Audi, overturned a federal district court’s decision that said Beirut courts had “exclusive jurisdiction” to try cases against Lebanese banks.

During Lebanon’s three-year financial collapse, banks have imposed tight controls on withdrawals in both U.S. dollars and the local currency, which has lost more than 90% of its value.

Those restrictions have yet to become law and have been challenged in both local and international courts by savers who have sought to gain back their money promptly in U.S. dollars, with mixed results.

The Raad family filed a lawsuit in New York’s Supreme Court in December 2020, saying Bank Audi had breached their contract by refusing to transfer their funds abroad at the beginning of the financial crisis, according to the court document.

Bank Audi moved the case to a federal district court, which dismissed their claim on the reasoning that such cases should be heard only by Lebanese courts.

Nada Abdelsater, a lawyer from ASAS Law representing Patricia, Stephanie and David Raad alongside lawyer Douglas Kellner, said this week’s new decision could allow them to proceed with the case, saying it had “made history.”

She said it was the first New York decision against a Lebanese bank since the crisis erupted in 2019.

“The door is now open, and the real action begins,” she told Reuters.

“This decision rightly removes the main obstacle that has so far been preventing cases from being taken up … and this New York decision allows us to further pursue proceedings in competent courts outside of Lebanon,” Abdelsater added.

There was no immediate response from Bank Audi in Beirut to a request for comment filed outside business hours.

Jeffrey Rotenberg, a lawyer from DLA Piper representing Bank Audi in the case, said the decision was “non-precedential.”

“As to this case, there are several other threshold grounds for dismissal that we will continue to advance in the District Court,” Rotenberg told Reuters by email.

Abdelsater said the Raads wanted access to $17 million they had in savings at Bank Audi.

(Reporting by Maya Gebeily in BeirutEditing by Tomasz Janowski and Matthew Lewis)

By Chris Prentice, Dhara Ranasinghe and Naomi Rovnick

NEW YORK/LONDON (Reuters) -A rout in global equities extended on Friday and government bond markets came under fresh selling pressure as hawkish tone from central bankers and weak data stoked recession fears.

The selling spilled over into commodities markets, where oil prices dropped over $2 per barrel. Gold prices faced their biggest weekly loss in four weeks after the Federal Reserve indicated it was not done hiking rates.

The dollar rose in choppy trading.

The Fed was one of a slew of central banks that jacked up interest rates and signalled that the fight to tame inflation this week.

Euro zone bond yields jumped a day after the European Central Bank pledged further monetary tightening to fight inflation. U.S. yields also rose, catching up with the global bond sell-off. [US/]

U.S. shares extended their slide, after data showed U.S. business activity contracted further in December, but softening demand helped to significantly cool inflation.

The data “confirmed Wall Street’s fears that the economy is quickly headed towards a recession,” said Edward Moya, senior analyst with OANDA.

The Dow Jones Industrial Average fell 0.85% to 32,920.46, the S&P 500 lost 1.11% to 3,852.36 and the Nasdaq Composite 0.97% to 10,705.41.

European shares posted their largest weekly loss since September, with the STOXX 600 index ending down 1.2%, skidding to a weekly loss of nearly 3.3%.

MSCI’s world stock index lost 1.1% and touched its lowest level in over a month.

S&P Global’s flash purchasing managers index showed eurozone economic activity contracted for the sixth consecutive month in December, although the deceleration also eased to its slowest pace in four months.

In Asia, Japan’s Nikkei index closed at its lowest in more than a month and MSCI’s broadest index of Asia-Pacific shares outside Japan was set for its worst week in two months.

The dollar index edged 0.23% higher, while the euro <EUR=> was down 0.3%.

This week’s hawkish message from central bankers brought an abrupt end to optimism that peak interest rates are on the horizon.

“Central banks delivered a blow to markets that were rebounding in anticipation of policymakers turning dovish on inflation and interest rates,” said Sunil Krishnan, head of multi-asset at Aviva Investors.

The ECB delivered a 50-bps hike like the Fed. Both opted for a smaller increase this time, but flagged there were more increases to come.

Its hawkish message prompted a second day of heavy selling across European bond markets where yields on benchmark German 10-year bonds jumped.

The yield on Germany’s rate-sensitive two-year bond rose as high as 2.503% on Friday,, its highest since 2008.

“We now expect the ECB to go to 3.25% (including 50 bps in March) and the Fed to 5.25% which argues for persistent pressure on yields and spreads,” said Christoph Rieger, head of rates and credit research at Commerzbank.

GROWTH WORRIES

In China, where markets are churning around an uncertain reopening, relief at the apparent resolution of a long-running accounting access dispute with the United States was not enough to bolster sentiment.

Meanwhile, Japan’s manufacturing activity shrank at the fastest pace in more than two years in December, while U.S. retail sales fell more than expected in November.

In commodities, the spot gold prices rose 0.88% by 4:17 p.m. EST (2117 GMT), but were poised for their biggest weekly loss in four weeks.

Gold futures settled up 0.7% at $1,800.20 per ounce. Interest rate hikes increase the opportunity cost of holding non-yielding bullion.

Oil prices dropped, with Brent crude futures settling at $79.04 per barrel, down 2.4% and U.S. crude finished down 2.4% at $74.29 per barrel.

(Additional reporting by Naomi Rovnick in London and Tom Westbrook in Singapore; Editing by Raissa Kasolowsky, Emelia Sithole-Matarise, Cynthia Osterman and Diane Craft)