Stocks rise, dollar falls; US labor softness fuels rate cut bets
NEW YORK/LONDON : MSCI's global equities gauge hit record highs on Thursday while U.S. Treasury yields fell with the dollar as data pointing to a softer job market eclipsed a higher-than-expected rise in U.S. inflation in the minds of investors.
The Consumer Price Index increased by 0.4 per cent in August, the most in seven months, after a 0.2 per cent rise in July, driven by a 0.4 per cent jump in housing costs and a 0.5 per cent increase in food prices. The cost of food consumed at home jumped 0.6 per cent.
In a separate report, the Labor Department said initial claims for state unemployment benefits jumped 27,000 to a seasonally adjusted 263,000 for the week ended September 6, the highest level since October 2021, whereas economists on average had expected 235,000 claims.
The higher-than-expected claims numbers solidified expectations that the Federal Reserve will cut U.S. interest rates next Wednesday and increased bets for more cuts in October and in December.
"It feels like markets are focused on the softening labor market. That implies a Fed that is going to embark on a rate-cutting cycle," said Mona Mahajan, head of investment strategy at Edward Jones. "After next week, they'll be looking to see how both the inflation and labor market plays out."
Traders were betting on a 100 per cent probability for a 25-basis-point rate cut at the Fed meeting next week with a 7 per cent chance for a half percentage point cut. Bets for another quarter percentage point cut in October rose to 86 per cent from about 74 per cent on Wednesday while the probability for a third cut in December rose to roughly 80 per cent from 68 per cent the day before, according to the CME Group's FedWatch tool.
"The focus shifted away from the CPI print to the jobless claim number. The claims number was a little bit higher than expected, so it is a potential indicator we're seeing further weakness in the labor market," said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.
"What you're getting is this tug of war between data that's pointing to slowing in the economy, but at the same time the reaction is to price-in additional Fed easing, which is giving support to the market," Janasiewicz added.
On Wall Street the major indexes hit record highs. At 02:39 p.m. the Dow Jones Industrial Average was up 592.34 points, or 1.30 per cent, to 46,083.26 while the S&P 500 rose 51.25 points, or 0.78 per cent, to 6,583.29 and the Nasdaq Composite rose 158.24 points, or 0.72 per cent, to 22,044.30.
MSCI's gauge of stocks across the globe was up 6.41 points, or 0.66 per cent, at 971.21 after hitting a record high for the second day in a row.
Earlier, the pan-European STOXX 600 index closed up 0.6 per cent after the European Central Bank kept its interest rates steady at 2 per cent, as expected, and trimmed its inflation forecasts but offered no clues about its next move, while investors continued to bet more support will be needed. [GVD/EUR]
In U.S. Treasuries, the yield on the benchmark 10-year Treasury note dipped below 4 per cent a few times in the session for the first time since early April after the inflation and jobless claim data.
The yield on benchmark U.S. 10-year notes fell 1.5 basis points to 4.017 per cent, from 4.032 per cent late on Wednesday, while the 30-year bond yield fell 2.2 basis points to 4.6554 per cent.
The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, fell 0.2 basis points to 3.531 per cent, from 3.533 per cent.
In currencies, the dollar fell broadly on the prospect of rate cuts. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.23 per cent to 97.56.
The euro was up 0.33 per cent at $1.1732, while against the Japanese yen the dollar weakened 0.14 per cent to 147.25. Sterling strengthened 0.32 per cent to $1.3572 and the Mexican peso strengthened 0.45 per cent versus the dollar at 18.513 while the Canadian dollar strengthened 0.17 per cent versus the greenback to C$1.38 per dollar.
In commodity markets, oil prices fell more than $1, snapping three days of gains, on concerns over softening U.S. demand and broad oversupply, which offset worries about output due to conflict in the Middle East and the Russian war in Ukraine. On Wednesday, Poland's downing of suspected Russian drones had triggered fresh talk of sanctions while Israel had attacked Hamas leaders in Qatar the day before.
U.S. crude settled down 2.04 per cent, or $1.30 at $62.37 a barrel, while Brent ended the session at $66.37 per barrel, down 1.66 per cent, or $1.12 on the day.
In precious metals, spot gold, which hit record highs earlier this week, fell 0.23 per cent on the day to $3,632.19 an ounce and U.S. gold futures fell 0.19 per cent to $3,636.50 an ounce.
