Labour data on Wednesday suggested the U.S. jobs market was losing steam, raising expectations the Federal Reserve may resort to large interest rate cuts, while additional reports including Friday's non-farm payrolls data are keeping sentiment on edge.
Risk sentiment remained frail, with the yen holding on to its gains for the week as traders seek safe assets while the dollar was steady in Asian hours after weakness overnight.
Hawkish rhetoric from the Bank of Japan also supported the yen after BOJ board member Hajime Takata hinted the central bank should stay on course to raise interest rates.
While the spotlight this week will be on Friday's U.S. non-farm payrolls report, in the meantime Thursday's U.S. jobless claims reading and euro zone retail sales data will keep investors busy.
Investors are also pricing in 110 bps of cuts from the remaining three Fed meetings this year, and when you factor in the Fed's focus on the labour market, it looks like economic data in the next few weeks will be put under the microscope by increasingly skittish investors.
Key Developments
Economic events: Euro zone August retail sales; August construction PMI data for Germany, France and euro zone
NEW YORK/LONDON (Reuters) - MSCI'S global equities gauge lost ground on Friday and U.S. Treasury yields fell after a mixed U.S. jobs report cemented expectations for the Federal Reserve to lower interest rate this month, but left investors uncertain about the size of the cut.
Non-farm payrolls rose by 142,000 in August, short of the 160,000 growth economists polled by Reuters had expected while July numbers were revised down to 89,000 from 114,000.
"It just looks like things are slowing down a bit, not like something cataclysmic is imminent," said Matt Rowe, head of portfolio management, cross asset strategies at Nomura Capital Management in New York. "What the market's going to get out of this is clear cover for the Fed to be cutting rates and a path to cutting rates more than once."
After the report, traders bet on a 63% probability that the Fed would cut rates by 25 basis points this month versus 60% on Thursday, while bets on a 50 basis point cut edged down to 37% from 40% the day before, CME Group's (NASDAQ:CME) FedWatch tool showed.
Federal Reserve Bank of New York President John Williams said on Friday he favors cutting rates but was not inclined to offer a view on how big the Fed's first move should be.
Wall Street indexes opened higher after the news but gradually declined into the late morning.
At 11:39 a.m. ET, the Dow Jones Industrial Average fell 337.59 points, or 0.83%, to 40,418.16, the S&P 500 lost 80.87 points, or 1.47%, at 5,422.55 and the Nasdaq Composite dropped 392.48 points, or 2.29%, to 16,735.18.
MSCI's gauge of stocks across the globe fell 9.39 points, or 1.16%, to 803.28 while Europe's STOXX 600 index fell 1.15%.
Germany's DAX index fell 1.4% after data showed the country's industrial production fell 2.4% in July, compared with analyst expectations for a 0.3% drop.
In the bond market, benchmark 10-year Treasury yields were down after the payrolls report but came off of a 15-month low.
"The market's really struggling with this one because it's really in the middle of what could be used as a justification for either a 25 or 50 basis point rate cut," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
The yield on benchmark U.S. 10-year notes fell 4.9 basis points to 3.684%, from 3.733% late on Thursday.
The 2-year note yield, which typically moves in step with interest rate expectations, fell 7.7 basis points to 3.6751% from 3.752% late on Thursday.
A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 0.7 basis points.
In currencies, the dollar index edged up in volatile trading with focus on the steady slowdown in the labor market suggesting more rate cuts after September.
"A half-point rate cut at the central bank's September meeting remains unlikely, but today's release provided clear evidence of a sharp deterioration in labor market fundamentals, and will bolster bets on at least one jumbo-sized rate cut in the coming months," said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, gained 0.09% at 101.13.
The euro was down 0.17% at $1.1092 but against the Japanese yen, the dollar weakened 0.77% to 142.34.
In energy markets, Oil prices lost ground after the payrolls report and were on track for a steep weekly loss as demand concerns outweighed delayed supply increases by OPEC+ producers.
U.S. crude lost 1.63% at $68.02 a barrel and Brent fell to $71.5 per barrel, down 1.64% on the day.
In precious metals, gold prices eased from near-record levels earlier in the session.
Spot gold dropped 0.25% to $2,510.13 an ounce. U.S. gold futures fell 0.13% to $2,508.10 an ounce.
A Look Ahead
Investors were also looking ahead to the U.S. employment report set for release Friday for an indication of the strength of the American economy.
TOKYO (AP) — Global shares were mixed in cautious trading Monday ahead of the Labor Day holiday in the U.S., when stock exchanges are closed.
France’s CAC 40 slipped 0.3% in early trading to 7,611.64, while Germany’s DAX fell 0.1% to 18,881.14. Britain’s FTSE 100 was little changed, down less than 0.1% at 8,370.39. U.S. shares were set to drift lower with Dow futures down 0.1% at 41,613.00. S&P 500 futures fell 0.1% to 5,654.25.
In Asia, Japan’s Nikkei 225 gained 0.1% to finish at 38,700.87, after the Finance Ministry reported capital spending by Japanese companies in the April-June quarter increased 7.4% from the previous year.
After a period of stagnation, Japan’s economy is showing signs of a recovery. Next week, Japan will release revised gross domestic product, or GDP, data, a measure of the value of a nation’s goods and services. The preliminary data released earlier showed the first growth in two quarters.
Australia’s S&P/ASX 200 rose 0.2% to 8,109.90, while South Korea’s Kospi gained nearly 0.3% to 2,681.00. Hong Kong’s Hang Seng slipped 1.7% to 17,691.97. The Shanghai Composite dipped 1.1% to 2,811.04.
A bit of pessimism rolled in over China’s growth prospects over the weekend, as its National Bureau of Statistics reported that August manufacturing PMI, a barometer of industrial output, fell from 49.4 to 49.1. That was weaker than market forecasts.
Recent reports on the U.S. economy, including inflation, consumer spending and income, have been encouraging. The Commerce Department said its personal consumption and expenditures report showed prices rose 0.2% from June to July, up slightly from the previous month’s 0.1% increase.
That means price rises are slowing down, and that’s likely to lead to the Federal Reserve cutting interest rates for the first time in more than four years. The market expects the Fed will start cutting rates later this month.
In other encouraging news, Friday’s Commerce Department report showed Americans stepped up their spending by 0.5% from June to July and incomes rose 0.3%, faster in July than the previous month.
In energy trading, benchmark U.S. crude rose 5 cents to $73.60 a barrel. Brent crude, the international standard, added 6 cents to $76.99 a barrel.
In currency trading, the U.S. dollar edged up to 146.68 Japanese yen from 146.18 yen. The euro cost $1.1071, up from $1.1053.
Yuri Kageyama is on X: https://x.com/yurikageyama
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