A gauge of global equities rose and the dollar edged higher yesterday (Aug 7), reversing downward moves after a mixed US jobs report last week, as investors await US and Chinese inflation data that could test the stock market’s recovery this year.
The dollar recovered from a one-week low on Friday following data showing the US economy added fewer jobs than expected in July, while solid wage gains and a drop in the unemployment rate suggested the Federal Reserve may keep rates higher for longer.
Additional interest rate hikes would likely be needed in order to lower inflation to the Fed’s 2 per cent target, Fed Governor Michelle Bowman said yesterday in remarks that largely repeated what she told a banking group on Saturday.
The dollar index, a measure of the US currency against six peers, edged up 0.03 per cent, while Treasury yields were mixed, with shorter-dated notes falling and long-dated securities rising.
A US economy growing more than expected has pushed aside fears of a recession, but rising bond yields pose a risk to equity investors, said Phillip Colmar, global strategist at MRB Partners in New York.
“The bond market is coming back into the driver’s seat again,” Colmar said, much as it was in 2022. “If the cost of capital isn’t the thing causing economic damage here, as everybody predicted — and our framework suggests it isn’t — then it’s pretty hard to argue for rate cuts.”
The yield on two-year Treasuries, which typically reflect interest rate expectations, fell 1 basis points to 4.781 per cent, while the yield on benchmark 10-year notes rose 3.3 basis points to 4.095 per cent.
“Rate cuts have been pushed out — not until the end of first quarter of next year is the expectation,” said Kevin Flanagan, head of fixed-income strategy at WisdomTree in New York. “After a long bout of trying to counter some of the narrative you were seeing from the Fed, Treasuries are now coming around to a meeting of the minds … that rates will more than likely be higher for longer.”
Futures imply only a 13.5 per cent chance of a Fed rate hike in September, but expectations rise to 30.1 per cent in November. A rate cut below 5 per cent is not expected until May 1, 2024.
MSCI’s gauge of stocks across the globe closed up 0.50 per cent, while the pan-European STOXX 600 index eked out 0.09 per cent gain.
On Wall Street, the Dow Jones Industrial Average rose 1.16 per cent, the S&P 500 gained 0.90 per cent and the Nasdaq Composite .IXIC added 0.61 per cent.
“It’s not just tech anymore. Basically it was all tech all the time through May 31st,” said Rhys Williams, chief strategist at Sprouting Rock Asset Management in Bryn Mawr, Pennsylvania.
Corporate results beat lowered expectations
Without the outsized returns of the megacap stocks in the first five months of the year, the remaining S&P 500 would have sported a negative year-to-date price return.
US corporate results have beaten greatly lowered expectations. With roughly 90 per cent of S&P 500 earnings reported, results are 4 per cent better than consensus estimates, with more than 79 per cent of companies beating the Street, according to Refinitiv I/B/E/S data.
Results due this week include Walt Disney and News Corp.
Data on the US consumer price index to be released Thursday is forecast to show headline inflation picking up slightly in July to an annual 3.3 per cent, while the core rate is seen unchanged at 4.8 per cent, according to a Reuters poll of economists.
“I am expecting a good CPI print this week. So that will help sentiment,” Williams said. “The surprise could be positive as the only thing that really worked against you this past month was oil and gas.”
Analysts have argued that Treasury supply hitting the market could pressure rates higher, as bond prices fall.
The Treasury Department plans on selling US$103 billion (RM469.6 billion) in Treasuries this week as it faces a growing deficit and the need to balance the overall profile of its debt issues. Fitch last week downgraded the United States’ credit rating.
The shift in yields has aided the dollar. The euro fell 0.1 per cent to US$1.1001, and the yen weakened 0.50 per cent to 142.49 per dollar.
Gold prices slid after the hawkish comments from the Fed’s Bowman. US gold futures settled 0.3 per cent lower at US$1,970.00 an ounce.
Oil prices fell as a sustained rally driven by Opec’s most recent production cut ran into the approaching end of higher demand from the US market, traders said.
US crude fell 88 cents to settle at US$81.94 a barrel, while Brent settled down 90 cents at US$85.34. — Reuters
