Treasuries Rise, Dollar Falls as Fed Bets Recede on Factory Data

Maisonneuve: 4-5% Market Return a Reasonable Expectation
  • ISM index signals contraction for first time in six months
  • Asian index futures signal losses after yen halts retreat

Treasuries climbed and the dollar fell as an unexpected malaise in American manufacturing had traders trimming wagers that the Federal Reserve will boost interest rates this month. Oil extended its slide.

Shorter-dated Treasuries, which are more sensitive to the outlook for monetary policy, outperformed longer-maturity securities. The greenback lost ground against most of its major counterparts, while the S&P 500 Index slipped less than a point, squarely within the same 1.5 percent band it has now occupied for 36 straight days -- the tightest trading range since 1964. Crude slumped after U.S. government data showed supplies at the highest seasonal level in more than two decades. Gold volatility slid to the lowest level this year.

Financial markets were taken aback by weak manufacturing data in the world’s largest economy, after reports in other major economies pointed to a recovery amid robust consumer spending. While Fed Chair Janet Yellen said last week that the case for an increase in borrowing costs has strengthened, wagers on a hike receded before key jobs data due Friday. Traders assign a 34 percent chance of higher rates this month, down from 40 percent earlier on Thursday, according to Fed fund futures data compiled by Bloomberg.

“Expectations for a rate hike have been pushed down slightly because investors want to see a continued string of strong data to support that view,” said Jack Ablin, the Chicago-based chief investment officer of BMO Private Bank, which oversees about $66 billion. “That creates a certain degree of uncertainty and doubt as to what the Fed’s likely to do. All eyes are on the payrolls number tomorrow. I don’t expect anything too dramatic from that.”

The Institute for Supply Management’s manufacturing index signaled contraction for the first time in six months. Elsewhere, an index of Chinese factory sentiment rose to the highest level in almost two years, while U.K. manufacturing showed resilience after the Brexit vote. A European index also indicated expansion.

The setback in U.S. manufacturing overshadowed optimism from earlier on Thursday after jobless claims rose less than economists had expected. Employers are forecast to have added 180,000 jobs to nonfarm payrolls last month, an increase that if realized would be the best initial reading for any August since 1998.

Fed Bank of Cleveland President Loretta Mester said Thursday there’s a “compelling” case for gradually raising interest rates, with the U.S. economy approaching the central bank’s targets on employment and inflation. She declined to say precisely when she believed rate increases would be necessary.


Benchmark 10-year Treasury yields fell one basis point, or 0.01 percentage point, to 1.57 percent as of 4 p.m. in New York, according to Bloomberg Bond Trader data. Yields on two-year notes dropped two basis points to 0.79 percent. The gap between five- and 30-year yields rose to 105 basis points.

“There’s just a general feeling that the Fed is getting ready for something,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings LLC in New York. “But we’ve been down this road so many times, and I’m still very wary.”

Treasuries posted their worst month in over a year in August after policy makers signaled to markets that the case to raise interest rates was strengthening. The Fed has kept rates on hold through five meetings this year following a hike in December that was the first in nearly a decade.

Spanish government bonds declined for a third day as the country’s Treasury sold almost 4 billion euros ($4.5 billion) of conventional debt and investor demand fell at the auction of 30-year securities.


Bloomberg’s Dollar Spot Index, which tracks the currency against 10 peers, dropped 0.4 percent. Mounting speculation over the prospect of a Fed rate hike this year pushed the U.S. currency to a one-month high on Wednesday.

“One bad ISM result won’t shift the dial, but what it does do is introduce some doubt when markets had been buying the U.S. dollar ahead of this Friday’s nonfarms,” said Bipan Rai, senior foreign-exchange and macro strategist in Toronto at Canadian Imperial Bank of Commerce.

The greenback rallied 0.6 percent last month as U.S. central bankers signaled that employment and inflation gains have bolstered the case to hike rates. That contrasts with major peers in Europe and Japan who are boosting stimulus.

Sterling rose to its highest level in four weeks against the dollar, leading gains among major currencies, while Brazil’s real led losses among emerging-market currencies, following commodities prices lower.


The S&P 500 slipped less than a point to 2,170.86 Thursday, reversing a drop of as much as 0.6 percent.

“When the market moves within a narrow range, it’s getting tightly wound and looking for news, and Friday’s number is a big number,” said Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, which manages $7.4 billion. “Because there is a lot of optimism built in, it’s going to be a show-me market.”

Disappointing jobs data hasn’t boded well for stock returns historically. Since 1996, the S&P 500 has been flat on average on the days when payrolls have trailed estimates, compared with a median 0.3 percent gain when the data beat expectations. The performance gap is more pronounced for August, where miss days saw the equity benchmark falling 0.4 percent versus a 1.2 percent advance for positive surprises.

Among shares moving today, Wal-Mart Stores Inc. advanced 2 percent with the retailer planning to move about 7,000 back-office workers in its supercenters to other parts of the store in a push to streamline operations. Campbell Soup Co. sank to an almost seven-month low after a disappointing earnings forecast amid a product recall and a poor carrot harvest at its Bolthouse Foods unit.

The Stoxx Europe 600 Index lost almost all of a 1 percent advance after the U.S. manufacturing data. Health-care shares posted their biggest two-day slump since June, while energy stocks followed oil prices lower. The MSCI Emerging Markets Index dropped for a second day, paring this quarter’s gains to 6.8 percent.

Futures on Asian stock indexes signaled declines, with contracts on benchmarks in Australia, South Korea, Hong Kong and mainland China down at least 0.1 percent in most recent trading. Nikkei 225 Stock Average futures dropped 0.1 percent to 16,930 in Osaka, before yen-denominated contracts on the Japanese equity measure rose 0.3 percent to 16,955.


West Texas Intermediate crude for October delivery declined 3.5 percent to $43.16 a barrel on the New York Mercantile Exchange. Futures have dropped 9.3 percent over the past four days. 

Supplies of oil in the U.S. rose by 2.28 million barrels last week, according to the Energy Information Administration. Meanwhile, Russian Energy Minister Alexander Novak said he sees no need for oil-producing nations to impose an output cap given current price levels. The comments came before OPEC members and other oil producers meet in Algiers for informal talks later this month.

“Inventories are rising and excess supply will grow,” said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut. “We’re not going to be comfortable pushing prices above $50 with only North America reducing output while the rest of the world is running all out.”

Gold futures for December delivery increased 0.4 percent to settle at $1,317.10 an ounce on the Comex in New York, rising for the first time in three days. Swings in the metal have abated as investors move to the sidelines ahead of Friday’s payrolls data.

Orange juice futures surged to a five-week high as a tropical storm headed toward Florida, the center of the U.S. citrus industry.

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