(Bloomberg) — Treasuries rallied and the dollar fell after fresh US data kept investors guessing on the size of an expected rate cut from the Federal Reserve next week.
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The policy-sensitive two-year Treasury yield dropped five basis points and the dollar retreated 0.2%, falling for a third day. Europe’s Stoxx 600 index added 0.2%, while US futures pointed to modest gains.
Investors remain divided on the magnitude of the Fed’s anticipated pivot to policy easing. The debate has continued after data Thursday showed that the US producer price index picked up slightly in August after the previous month’s numbers were revised lower. Meanwhile, an uptick in applications for unemployment benefits renewed concerns about a weakening labor market.
Former New York Fed President William Dudley was the latest to weigh in, saying at a forum in Singapore Friday that he sees scope for a half-point rate cut at next week’s meeting. “I think there’s a strong case for 50,” Dudley said. “I know what I’d be pushing for.”
Traders are now betting on 33 basis points of cuts from the Fed on Sept. 18, versus 31 basis points on Thursday and 26 basis points on Wednesday.
US PPI data “kept the door open for a 50 basis-point cut next week,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “Though we still believe a 25 basis point cut is much likely than a 50 basis point cut, the possibility of a 50 basis point cut will keep the US dollar heavy in the meantime.”
Thursday’s wholesale inflation data followed the more closely watched consumer price index, which showed underlying inflation accelerated in August. Yet policymakers have made it clear that they’re currently highly focused on softness in the labor market, which is more likely to drive policy discussions in the months ahead.
“With PPI basically repeating yesterday’s CPI reading and jobless claims in line with expectations, the decks have been cleared for the Fed to kick off a rate-cutting cycle,” said Chris Larkin at E*Trade from Morgan Stanley. “The markets are anticipating an initial 25 basis-point cut, but the discussion will soon turn to how far and fast the Fed is likely to trim rates over time.”
BOJ Hike
In Japan, shares fell as the yen rose to around 141 per dollar, potentially denting the competitiveness of the export-oriented economy.
Just over half of central bank watchers see authorities conducting their next rate hike in December, while none expect a policy move when the board meets next week, according to a Bloomberg survey.
West Texas Intermediate, the US oil price, edged higher after rising more than 2% Thursday as storm Francine disrupted production in the Gulf of Mexico. Gold rose to a fresh record, partly fueled by the dollar’s decline.
Key events this week:
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Eurozone industrial production, Friday
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Japan industrial production, Friday
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U. Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
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The Stoxx Europe 600 rose 0.3% as of 8:02 a.m. London time
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S&P 500 futures were little changed
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Nasdaq 100 futures were little changed
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Futures on the Dow Jones Industrial Average were little changed
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The MSCI Asia Pacific Index rose 0.4%
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The MSCI Emerging Markets Index rose 0.5%
Currencies
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The Bloomberg Dollar Spot Index fell 0.2%
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The euro was little changed at $1.1079
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The Japanese yen rose 0.5% to 141.07 per dollar
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The offshore yuan rose 0.2% to 7.1013 per dollar
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The British pound was little changed at $1.3134
Cryptocurrencies
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Bitcoin fell 0.7% to $57,811.78
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Ether fell 0.5% to $2,339.67
Bonds
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The yield on 10-year Treasuries declined three basis points to 3.64%
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Germany’s 10-year yield declined two basis points to 2.13%
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Britain’s 10-year yield declined three basis points to 3.76%
Commodities
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Brent crude rose 0.6% to $72.38 a barrel
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Spot gold rose 0.4% to $2,567.38 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Sybilla Gross.
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