Dollar Falls, Bonds Gain on Fed Bets; U.S. Stocks Edge Higher

  • GDP disappointment sends Fed fund futures tumbling in 2016
  • S&P 500 climbs to record, caps fifth monthly advance

Did Kuroda's Radical Policy Knowingly Disappoint?

The dollar tumbled and Treasuries rose after data showing tepid U.S. economic growth dimmed the prospects for higher interest rates this year. The S&P 500 Index capped a fifth monthly gain, while oil rebounded from the precipice of a bear market.

The Bloomberg Dollar Spot Index erased a monthly advance after the U.S. economy grew slower than forecast, sending the odds for a Federal Reserve rate hike by December tumbling to 36 percent. Brazil’s real and South Africa’s rand led gains in emerging markets. That triggered a rebound in Treasuries and gold. The S&P 500 Index claimed its longest run of monthly gains since 2014 as earnings from Alphabet Inc. boosted technology shares. The yen rallied against its 31 major peers after Japan’s central bank stimulus disappointed.

A month of big swings in the $5.3 trillion-a-day foreign exchange market is set to end with a bang as investors digest slower-than-anticipated U.S. economic data after a weaker start to the year than previously estimated. The report comes on the heels of the Bank of Japan’s decision to keep its bond-buying target and policy rate unchanged, opting instead to boost purchases of exchange-traded funds. In Europe bank stress test are due later on Friday.

“Effectively what is occurring is that the expectation for a Fed rate hike is after the election,” said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel, Nicolaus & Co., which oversees about $170 billion. “The GDP data point is not a great surprise to the overall expectations of the Federal Reserve. In regard to the overall equity market, all eyes are on earnings and those have stabilized for the most part for this quarter.”

Currencies

The Bloomberg Dollar Spot Index slid 1.3 percent at 4 p.m. in New York. Gross domestic product rose at a 1.2 percent annualized rate after a 0.8 percent advance the prior quarter, according to the Commerce Department. The median forecast of economists surveyed by Bloomberg called for a 2.5 percent second-quarter increase.

The yen climbed 2.3 percent to 102.83 per dollar, bringing its gain this year to about 17 percent. Bank of Japan Governor Haruhiko Kuroda led his board in voting to increase its ETF program to 6 trillion yen ($58 billion) a year, the BOJ said. The announcement comes after decisions this month from the Fed, the European Central Bank and the Bank of England to leave their key interest rates unchanged as they assessed the economic fallout from the U.K.’s vote to leave the European Union.

“The BOJ’s disappointment, which also follows the ECB and BOE’s recent decisions to hold off easing, may just cause markets to re-assess whether they had front-run things too much,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore.

Stocks

The S&P 500 Index rose 0.2 percent to 2,173.46, ending July two points below an all-time high after a 3.6 percent advance. The gauge has risen for five straight months, the longest winning streak since 2014. It’s rallied 8.7 percent since reaching a post-Brexit low on June 27.

The Dow Jones Industrial Average slipped 0.1 percent for a fifth straight decline, it’s longest slump since mid-June. It’s fallen 0.7 percent in that stretch to pare a July advance to 2.8 percent.

Google parent Alphabet advanced to the highest since December 2015, falling below a record in the final minutes of trading, after reporting second-quarter earnings and sales that beat analysts’ estimates as growth in cloud-computing and corporate software businesses improved. Amazon.com Inc. rose as profit topped projections. Exxon Mobil Corp. fell after reporting profit dropped, missing analyst estimates.

The Stoxx Europe 600 Index rose 0.7 percent, taking its monthly increase to 3.6 percent. The rebound hasn’t been enough for the gauge to recoup its losses since the U.K. referendum on June 23. Japanese stocks slid as much as 1.4 percent after the BOJ decision, before recovering to close with a gain of 1.2 percent.

Banca Monte dei Paschi di Siena SpA was the worst performer in European regulators’ stress tests, the only lender to have its capital wiped out in the exam, as the region struggles to contain an Italian banking crisis.

The MSCI Emerging Markets Index was little changed Friday, leaving its gain in July at 4.9 percent, the most since March. The Ibovespa extended its biggest monthly advance since March after oil giant Petroleo Brasileiro SA took a step further in its plan to reduce debt.

Bonds

Treasuries capped a weekly advance, with two-year notes snapping the longest slide since May on the prospect for lower rates for longer.

Yields on 10-year Treasuries fell five basis points to 1.45 percent. Yields are set for a weekly drop, driving them back toward the record low of 1.32 percent reached July 6, after Fed officials signaled they are in no rush to raise interest rates, even as they noted that near-term risks to the economic outlook have diminished.

The yield on Japan’s 10-year bonds jumped eight basis points to minus 0.19 percent, set for the steepest increase May 2013, based on closing prices. German 10-year bonds rose for a third day, extending a weekly advance.

Commodities

Gold futures capped a second straight weekly advance as the dollar weakened, boosting demand for the metal as a store of value. Futures for December delivery rose 1.2 percent to settle at $1,357.50 in New York. Prices climbed 2.8 percent this month. Most-active silver futures rallied 9.3 percent this month. Prices for the September contract added 0.8 percent Friday to $20.347 an ounce.

Oil looked poised to enter a bear market in New York before the dollar’s tumble sent the price back above $41 a barrel. It’s still headed for the biggest monthly decline in a year amid brimming crude and fuel inventories. West Texas Intermediate crude rose 1.1 percent to settle at $41.60 a barrel. Brent oil in London slid 0.6 percent to $42.46.

Nickel fell as traders awaited further developments on supply disruptions in the Philippines after the metal surged by the most in more than two weeks on Thursday. Other metals traded in London rose, led by aluminum.

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