Global stock index rose: Treasury yields climb with rates in focus

Reuters: MSCI’S global stock index rose on Thursday while the Dow closed at its highest level since mid-January 2022, and bond yields and the dollar gained after Federal Reserve officials sounded caution about interest rate cuts.

Global Markets: Global stock index rose

The U.S. Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2% last month in line with economists’ expectations. The annual inflation increase was the smallest in more than 2-1/2 years, signaling cooling demand. U.S. Treasury yields climbed even after economic data provided more evidence that the Fed could end rate hikes. After a sharp decline in recent weeks, the benchmark 10-year yield is on pace for its biggest monthly drop since August 2011.

The dollar gained as investors took profits on bets it would weaken further and shrugged off economic data suggesting the Fed could be done hiking rates. “Just about all the data today was favorable for investors. Most importantly, we continue to see a deceleration in the Fed’s preferred measure of inflation, the core PCE price index,” said Russell Price, chief economist at Ameriprise Financial Services Inc, in Troy, Michigan. He said this “should be a good thing for Fed decision-making in the next few meetings.”

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While the closely watched U.S. inflation data was in line with economists’ expectations, some traders appeared to have priced in slower inflation, said John Augustine, chief investment officer at Huntington Private Bank. “The market was anticipating that there would be a downside surprise, that inflation would come down faster and spending would fall faster than consensus,” said Augustine. Also on Thursday, Fed policymakers offered mixed messages with pushbacks on investor bets for a quick pivot to rate cuts.

New York Fed Bank President John Williams said if price pressures and imbalances persist “additional policy firming may be needed.” And San Francisco Fed President Mary Daly said she is thinking about whether policy is “sufficiently restrictive to restore price stability” rather than about rate cuts. MSCI’s gauge of stocks across 47 countries rose 0.2%, on track for a monthly gain of 9%, after three straight months of declines. This would mark its biggest monthly percentage increase since 2020 when investors reacted to the first COVID-19 vaccine breakthroughs.

Earlier the pan-European STOXX 600 index had closed up 0.55%, confirming its biggest monthly percentage gain since January as weak economic data from Europe bolstered bets for rate cuts. The Dow Jones Industrial Average rose 520.47 points, or 1.47%, to 35,950.89, the S&P 500 gained 17.22 points, or 0.38%, at 4,567.8 and the Nasdaq Composite dropped 32.27 points, or 0.23%, to 14,226.22. The Dow, which is an index of 30 blue-chip U.S. stocks, hit its highest intraday level so far in 2023 and registered its biggest monthly percentage gain since October 2022. Its biggest boost came from Salesforce Inc after the company’s strong quarterly report.

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U.S. Dollar

Reuters: The dollar gained on Thursday as investors took profits on bets the currency would weaken further and shrugged off data showing signs the U.S. economy is slowing. Thursday’s economic data suggested that the Federal Reserve is likely done raising interest rates and may start easing by the middle of next year, typically a dollar-negative factor. Euro weakness after a soft euro zone inflation report also partly helped boost the greenback, analysts said. The dollar index, which measures its value against six major currencies, rose 0.6% to 103.38 and was on track to post its best daily gain in more than a month. On a monthly basis, the dollar has posted a 3% loss, on pace for its worst monthly showing in a year.

Some analysts said the dollar may have benefited from month-end demand, as investors squared up positions for November, a period that featured a sharp sell-off in the U.S. currency with the market pricing in rate cuts next year. Others, however, expected a dollar sell-off at month-end with stocks’ sharp gains for November. There were sell dollar signals at some of the biggest U.S. banks, analysts said. “We were expecting dollar selling at month-end given how much U.S. equities rallied. That typically means foreign asset managers would have sold dollars forward,” said Vassili Serebriakov, FX strategist, at UBS in New York. “But it’s possible that some of the selling happened earlier in the month. So maybe there’s less dollar selling at month end.”

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Dollar gains persisted despite reports that showed U.S. inflation continued to moderate in October and jobless claims rose in the latest week suggesting a slowing labor market. Inflation as measured by the personal consumption expenditures price index was unchanged in October after climbing 0.4% in September. In the 12 months through October, the PCE price index increased 3.0%. That was the smallest year-on-year gain since March 2021 and followed a 3.4% advance in September. Meanwhile, initial claims for state unemployment benefits increased 7,000 to a seasonally-adjusted 218,000 for the week ended Nov. 25. Economists had forecast 226,000 claims.

In other currencies, the euro fell after euro zone inflation eased by more than forecast this month, fuelling bets of early European Central Bank rate cuts. Consumer price growth in the 20 countries that share the euro currency dropped to 2.4% in November from 2.9% in October, well below expectations for a fall to 2.7%. The euro last changed hands at $1.0889 against the dollar, down 0.7% . It is still poised to show a monthly gain of 3%, the largest since November 2022.

Against the yen, the dollar rose 0.7% to 148.20 yen. For November, the greenback was down 2.3%, on pace for its largest monthly fall since December last year. “The broader picture is that the dollar has weakened quite substantially in November. It’s still probably a two-way risk from here in terms of the Fed December meeting,” Serebriakov of UBS said. “The U.S. data hasn’t slowed significantly. Inflation has but activity data remains relatively resilient,” he added. U.S. rate futures have priced in about a 47% chance of a rate cut at the March 19-20, 2024 meeting, rising to about 78% probability at the April 30-May 1 meeting, the CME FedWatch Tool showed on Thursday. Overall, the rates market sees roughly 100 basis points of cuts by the end of 2024, according to LSEG data.

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South African Rand

Reuters: The South African rand weakened against a broadly stronger U.S. dollar on Thursday after local data showed a rise in producer inflation, a widening budget deficit and a trade deficit. At 1510 GMT, the rand traded at 18.8850 against the dollar, about 0.7% weaker than its previous close. The dollar last traded around 0.6% stronger against a basket of global currencies, boosted by month-end demand as investors squared positions for November. South Africa’s producer inflation quickened to 5.8% year on year in October from 5.1% in September, statistics agency data showed, in line with expectations. The country’s budget balance data for October showed a deficit of 41.23 billion rand ($2.19 billion), compared to a deficit of 40.57 billion rand in the same month a year earlier.

The South African Revenue Services also published trade balance figures for October, showing a deficit of 12.66 billion rand. Investors had expected lacklustre figures, said analysts at ETM Analytics. “On a trade-weighted basis, the ZAR has had a bad week, reflecting the onset of more intense load-shedding and the plethora of negative news headlines, mostly related to dysfunctional SOEs (state-owned enterprises),” ETM said in a research note. South Africa’s benchmark 2030 government bond was weaker, with the yield up 6.5 basis points at 9.980%.

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British Pound

FXStreet: GBP/USD recovers its recent losses registered in the previous session, trading higher around 1.2650 during the Asian session on Friday. The GBP/USD pair strengthened on weaker US Dollar amid downbeat US Treasury yields. Additionally, Bank of England officials have been sending hawkish signals throughout the week, providing a boost to the Pound Sterling. There is an estimate that the BoE will maintain higher interest rates for an extended period, especially considering that inflation is currently more than twice the central bank’s target.

Interest rate-setter Megan Greene from the Bank of England expressed concerns about persistently high inflation, indicating that interest rates might need to remain elevated for an extended duration. This perspective contrasts with some recent data suggesting a potential downturn in the economy. The US Dollar Index encounters a challenge as the 2-year US Bond yield drops to 4.67%, by the press time, following recent gains. Despite the Greenback surging to 103.59 on Thursday, the DXY trades lower at 103.30.

Moreover, the US Core Personal Consumption Expenditures Price Index displayed a year-on-year easing to 3.5% in October from the previous reading of 3.7%, meeting expectations. The month-on-month Core PCE Price Index saw a decrease to 0.2% from the prior 0.3%. Additionally, Initial Jobless Claims for the week ending November 24 totaled 218K, slightly below the expected 220K but higher than the revised previous figures of 211K (revised from 209K). Investors await Nationwide Housing Prices from the United Kingdom on Friday, along with the US ISM Manufacturing PMI for November. Moreover, the focus will be on US Federal Reserve Chairman Jerome Powell’s speech.

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Published by the Mercury Team on 1 December 2023

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