By Sinéad Carew and Marc Jones
NEW YORK/LONDON (Reuters) – MSCI’s global equities gauge hit a record high on Thursday while U.S. Treasury yields fell along with the dollar due to growing expectations for interest rate cuts, as softer labor market data overshadowed a higher-than-expected U.S. inflation reading.
The Consumer Price Index increased by 0.4% in August, the most in seven months and following a 0.2% rise in July, driven by a 0.4% jump in housing costs and a 0.5% increase in food prices. The cost of food consumed at home jumped 0.6%.
But 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, which was the highest level since October 2021 and surpassed economist estimates for 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 play out.”
Traders were betting on a 100% probability for a rate cut at the Fed meeting next week with a roughly 5% chance for a super-sized half percentage point cut. Bets for another quarter percentage point cut in October rose to about 86% from Wednesday’s 74%, while the probability for a third cut in December rose to roughly 79% from 68%, 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 three major indexes registered record closing highs. The Dow Jones Industrial Average rose 617.08 points, or 1.36%, to 46,108.00, the S&P 500 rose 55.43 points, or 0.85%, to 6,587.47, and the Nasdaq Composite rose 157.01 points, or 0.72%, to 22,043.08.
MSCI’s gauge of stocks across the globe rose 6.92 points, or 0.72%, to 971.72, after hitting a record high for the second day in a row.
Earlier, the pan-European STOXX 600 index closed up 0.6% after the European Central Bank kept its interest rates steady at 2%, 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% a few times in the session, marking five-month lows, after the inflation and jobless claims data.
The yield on benchmark U.S. 10-year notes fell 0.8 basis point to 4.024%, from 4.032% late on Wednesday.The 30-year bond yield fell 1.9 basis points to 4.6583% from 4.677% late on Wednesday.
The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 1.1 basis points to 3.544%, from 3.533% late on Wednesday.
In currencies, the dollar weakened against major currencies including the euro and the yen on the prospect of more rate cuts.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.28% to 97.51.
The euro was up 0.38% at $1.1738, while against the Japanese yen the dollar weakened 0.21% to 147.15.
Sterling strengthened 0.37% to $1.3579 while the Mexican peso rose 0.74% versus the dollar to 18.455 and the Canadian dollar strengthened 0.21% versus the greenback to C$1.38.
In commodity markets, oil prices fell more than $1, snapping three days of gains, on concerns over softening U.S. demand and global 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. [O/R]
U.S. crude settled down 2.04%, or $1.30, at $62.37 a barrel, while Brent ended the session at $66.37 per barrel, down 1.66%, or $1.12, on the day.
In precious metals, spot gold, which hit record highs earlier this week, fell 0.13% to $3,635.83 an ounce. U.S. gold futures fell 0.19% to $3,636.50 an ounce.
(Reporting by Sinéad Carew and Marc Jones; Editing by Alexandra Hudson, Will Dunham, Kevin Liffey and Edmund Klamann)
