Bond markets caught a welcome break, but the next major US jobs report could still reshape expectations for central bank policy.
Asian shares rose on September 4 amid a global market rally. Investors are preparing for the release of key US employment data, while bond markets received support after Federal Reserve official Christopher Waller made remarks that eased concerns about a rate hike.
Waller said recent economic indicators pointed to some moderation in inflation. If upcoming reports confirm this trend, he will advocate keeping rates at their current level at this month’s meeting.
Following his remarks, futures markets lowered the probability of a September rate hike to 50%, from approximately 63% the previous day. Expectations of tighter Federal Reserve policy had strengthened the day before amid a massive sell-off in government bonds, concerns about persistent inflation, rising government debt, and geopolitical tensions.
Waller is pushing back against the main argument made by Worsh, who said last week that there was insufficient evidence of a decline in underlying inflation.
We believe Chair Worsh will push for a rate hike if he speaks in favor of it. Without such a stance, Waller’s speech confirms our assessment: more convincing evidence will be needed to persuade the majority, which is guided by economic data, to raise rates this month.
The broad Asia-Pacific ex-Japan share index climbed 1%, tracking Wall Street’s performance. However, it remained down 0.4% for the week.
Japan’s Nikkei index gained 0.8% but fell 2.7% over the week. Shares of China’s largest companies rose 1%, while South Korea’s KOSPI index advanced 1.1%.
Futures on US stock indexes and the Euro Stoxx 50 index were little changed. Traders are awaiting the US employment report for August, which was due to be released later that day. Analysts forecast the creation of 56,000 jobs following an unexpected decline of 23,000 a month earlier. The unemployment rate is expected to remain at 4.1%.
Separate US economic data showed that activity in the services sector accelerated last month. At the same time, the prices paid index rose to a three-year high. The Federal Reserve’s Beige Book also recorded a slight pickup in economic activity in recent weeks.
Bonds get a reprieve
US government bonds rose after Waller’s restrained remarks, with short-term securities posting the largest gains. The yield curve steepened as concerns about an imminent rate hike eased.
The two-year yield stood at 4.3381%. The previous day, it fell 5 basis points, moving away from a 20-month high of 4.4102%.
The yield on 10-year securities was little changed at 4.7620% after falling 3 basis points in the previous session. The yield on 30-year bonds declined 2 basis points to 5.2433%.
Investors remain cautious about long-term bonds because of inflation risks. Talks between the United States and Iran on ending the war and restoring shipping through the Strait of Hormuz have made little progress. Oil prices remained near six-week highs, with Brent crude futures up 7% this week at $95.52 a barrel.
The dollar received little noticeable support from higher bond yields. Its index stood at 98.96 after falling 0.6% the previous day. The US currency is set to weaken by 0.7% over the week.
Against this backdrop, the Japanese yen continued to strengthen. It gained 2.6% over the week and traded at 155.7 yen to the dollar, approaching the 155.2 level reached after Tokyo and Washington’s joint currency intervention at the end of July.
The yen also received support from rising expectations of a Bank of Japan rate hike this month. Markets put the probability of such a move in September at 75%, while a hike by October is already fully priced in. This is fueling speculation about a larger increase or two consecutive steps toward unwinding the accommodative policy.
Another review of the price situation or a currency intervention cannot be ruled out. At the same time, the current move may be preliminary positioning – official or speculative – in anticipation of a weak US nonfarm payrolls report and a potentially more hawkish Bank of Japan meeting in two weeks.
In commodity markets, gold held at $4,470 per troy ounce after jumping 2% the previous day. Despite this, its price is likely to be little changed for the week.
- Wall Street stocks rose as Fed Governor Christopher Waller signaled support for holding rates steady if inflation continues easing, while oil prices and geopolitical risks clouded September trading.
- Gold prices fell as traders assessed Middle East tensions and awaited US employment data that could influence expectations for Federal Reserve interest rate decisions.
- As US debt exceeds $40 trillion, six financial crises reveal how Washington transformed borrowing through retail bonds, yield controls, Treasury auctions and foreign currencies.