[1/3]A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 19, 2023. REUTERS/Brendan McDermid/File Photo
NEW YORK, Jul 20 (Reuters) – The dollar rose Thursday and a gauge for global stocks fell Thursday after data again revealed continued strength in the US labor market. This suggests that the Federal Reserve will keep interest rates high longer to curb inflation.
Fewer-than-expected Americans filed new claims for unemployment benefits last week, the Labor Department said, though the decline was likely exaggerated by difficulties in adjusting the data to seasonal patterns.
The number of claims is well below the 280,000 level that economists say would indicate a significant slowdown in job growth given the relative size of the US labor market.
The dollar index rose 0.60% against a basket of trading currencies, while futures expect the Fed overnight rate to rise to 5.42% in November and remain close to or above 5% through May 2024.
In contrast, driven by declining headline inflation numbers, the stock market expects the Fed to end its rate hike campaign during a two-day policy meeting concluding July 26.
The jobless claims report, along with solid retail sales on Tuesday, pushed Treasury yields onto the idea that the Fed will keep rates high longer, said Ben Jeffery, a strategist on the US interest rate team at BMO Capital Markets in New York.
“We still have a chance of another move in September or November,” he said. “That’s probably because of the design of the Fed. To keep financial conditions tight enough to continue to fight inflation, they want to make sure there are no price cuts in 2023.”
Two-year government bond yields, which typically move in line with interest rate expectations, rose 7.5 basis points to 4.830%.
Colin Graham, head of multi-asset strategies at Robeco in London, said once interest rates spike, the Fed will only cut them if something bad happens.
“The structural view of inflation has to change. People assume the Fed has done enough,” he said. “The main line (inflation) is down due to food and energy. The core PCE hasn’t changed and that’s the Fed’s preferred metric.”
Graham was referring to the consumer price index (CPI), which fell below 3% year-on-year in June, and the personal consumption expenditure (PCE) price index. Core PCE is running at an annual rate of 4.6%-4.7% this year, more than double the Fed’s 2% target.
The S&P 500 (.SPX) fell 0.57% and the Nasdaq Composite (.IXIC) fell 1.85% on Wall Street as disappointing earnings from Netflix and Tesla weighed in, while the Dow Industrials (.DJI) rose 0.59%. MSCI’s US-focused measure of equities around the world (.MIWD00000PUS) lost 0.51%.
In Europe, the pan-regional STOXX 600 index (.STOXX) closed 0.42% higher as metal prices rose, and wheat rose 2.3% after Russia hit Ukraine’s ports and lifted mining and basic stocks (.SXPP) by more than 2%.
Earlier in Asia, equity and commodity markets (.HSMPI) posted gains after the Chinese government pledged additional support for the economy. However, technology stocks (.CSIINT) fell again on festering real estate concerns.
The Chinese yuan soared after authorities adjusted cross-border financing rules and major state-owned banks sold dollars. The Turkish lira stalled near a record low as the second rate hike since President Tayyip Erdogan took power for a third decade in May fell short of expectations.
Investors are focused on the next moves from major economy central banks at meetings in Japan, Europe, the United States and Britain.
Bank of Japan Governor Kazuo Ueda said this week that there was still some distance to sustainably and stably reaching the central bank’s inflation target of 2%, allaying speculation about a change in its yield curve control policy next week.
Traders and analysts expect the European Central Bank to raise its benchmark rate by 25 basis points next week, but what happens next is up for debate in the wake of a recent easing by central bank policymakers.
FRAGILE CHINA
Chinese equities have been under pressure from weak economic data in recent weeks, with investors waiting for meaningful stimulus to jump-start the country’s faltering post-pandemic recovery.
Daleep Singh, chief economist at PGIM Fixed Income, said China’s current recovery is different from others as it relies on consumer-led growth after years of credit-driven investment in real estate and infrastructure.
Oil prices rose slightly on lower US crude inventories and strong crude imports from China, but weaker demand prospects kept investors cautious.
US crude rose 28 cents to $75.63 a barrel, while Brent rose 18 cents to $79.64.
Gold prices fell from a two-month high as the dollar and bond yields rose.
US gold futures closed 0.5% lower at $1,970.90 an ounce.
Reporting by Herbert Lash, additional reporting by Marc Jones in London, Ankur Banerjee in Singapore; Edited by Sharon Singleton, John Stonestreet and Richard Chang
Our standards: The Thomson Reuters Principles of Trust.