NEW YORK/LONDON :Global shares traded close to one-month highs on Tuesday, boosted by revived optimism that the Federal Reserve cuts US interest rates once if not twice this year, while a weaker yen offset by a stronger euro kept the dollar steady.
A US jobs report last week that was weaker than economists had forecast and data showing the slowest growth in nearly two years the prior week sparked a dramatic swing in the outlook for when and by how much the Fed might cut rates.
Traders are now pricing in 45 basis points of Fed rate cuts by the end of 2024, with a first cut possibly in September, according to LSEG’s rate probability app. Traders had recently priced in just one cut due to sticky inflation data.
The yield on benchmark 10-year Treasury notes slid to an almost a one-month low of 4,420 per cent, while the dollar index, a measure of the US currency against six peers, was off about 1.2 per cent from nearly a six-month high on May 1.
“There’s been a lot of talk about the end of US exceptionalism the last few days,” said Thierry Wizman, global FX and interest rates strategist at Macquarie in New York, suggesting the market may be misjudging the economy’s strength.
“Until we see strong underlying reasons to believe why the rest of the world should catch up and surpass the US, it doesn’t look like the trend of a weak dollar that we’ve seen in the last two weeks will persist,” he said.
The strength of the US housing market and potentially stalled progress on inflation means monetary policy may be less restrictive than officials believe, Minneapolis Fed President Neel Kashkari said in an essay that raises the possibility prices are “settling” at a level above the Fed’s 2 per cent target.
The renewed outlook for lower rates has increased the appetite for stocks and other riskier assets, such as bitcoin.
MSCI’s gauge of global stock performance gained 0.39 per cent, its highest since April 10. On Wall Street, the Dow Jones Industrial Average rose 0.11 per cent, the S&P 500 advanced 0.27 per cent and the Nasdaq Composite added 0.2 per cent.
In Europe, the pan-regional STOXX 600 index jumped 1.14 per cent to a one-month high as UBS shares rose 7.59 per cent after beating expectations.
Treasury yields slipped, with traders focused on absorbing $125 billion in new supply this week, while last week’s jobs report and comments by Fed Chair Jerome Powell spurred a rally.
Demand will be tested at an auction of $58 billion in three-year notes on Tuesday, followed by $42 billion in 10-year notes on Wednesday and $25 billion of 30-year bond on Thursday.
The 10-year Treasury fell 5.2 basis points to 4,437 per cent, while the two-year note, which reflects interest rate expectations, slid 1.5 basis points to 4,807 per cent.
“We found out late last week Powell & Co. really don’t have an appetite for raising rates and then the jobs number coming in a little bit softer than expected provided some needed fuel for a relief rally in the Treasury market,” said Kevin Flanagan, head of fixed income strategy at WisdomTree in New York.
Expectations of falling rates have weighed on the dollar, though only gently. European policymakers are readying cuts for June, capping the euro, and rates are not expected to move too far above zero in Japan this year, leaving a wide gap with the rest of the world.
The dollar index rose 0.04 per cent, with the euro up 0.04 per cent to $1.0772.
The yen, meanwhile, weakened 0.38 per cent at 154.47 per dollar.
Traders estimate Japan spent almost $60 billion defending the yen last week.
Australia’s central bank left interest rates on hold, as expected, but the Aussie dollar slipped about 0.23 per cent to $0.6607 after policymakers did not strengthen guidance around the risk of another rate hike.
Sterling eased 0.23 per cent to $1.2531.
Oil prices steadied as weakness in the physical market and concerns about sticky US inflation countered fears of escalation in the Middle East as Israel stepped up attacks in southern Gaza while a ceasefire deal hung in the balance.
US crude recently rose 0.28 per cent to $78.70 per barrel and Brent was at $83.50, up 0.2 per cent on the day.
Spot gold dropped 0.4 per cent to $2,315.25 an ounce.
Bitcoin rose 0.68 per cent to $63,592.00.
(Additional reporting by Tom Westbrook in Singapore; Editing by Bernadette Baum, Ed Osmond and Nick Zieminski)
