Stock, Bond Rally Fizzles as Fischer Remarks Bolster Rate WagersBy , , and
Yellen’s speech consistent with possible Sept. hike: Fischer
Two-year Treasury yields at highest since June; dollar gains
The stock market optimism with Janet Yellen’s bullish comments on the U.S. economy fizzled after Federal Reserve Vice Chairman Stanley Fischer said an interest-rate increase is possible in September. Bonds tumbled, while the dollar gained.
Both global and American equities extended their weekly losses, while the yields on two-year Treasuries climbed to the highest since June as traders increased their bets on a Fed hike. The difference in yield between U.S. notes due in five years and those maturing in three decades tumbled to the least since March 2015. The dollar rose against most of its major peers. Oil trimmed its decline for the week.
Markets have been whipsawed by comments from Fed officials indicating that borrowing costs in the world’s largest economy could rise as early as next month amid uneven global growth. Yellen said the case to raise rates is getting stronger as the economy approaches the central bank’s goals, while Fischer told CNBC that her remarks were consistent with the possibility of two hikes this year. Futures indicated a 42 percent chance of an increase in September and a 63 percent probability by December, according to data compiled by Bloomberg.
“Fischer wants to make September still on the table,” said Mark Kepner, managing director and equity trader at Themis Trading LLC in Chatham, New Jersey. “He mentioned he’s not concerned about the low growth we have had the first six months. He’s saying growth is more a productivity and investment story. There are light volumes, lightly staffed desks and these moves can easily happen.”
Ending two months of public silence about her views, Yellen cited “continued solid performance of the labor market” in her speech Friday to central bankers and economists in Jackson Hole, Wyoming.
“If we get a really strong employment report, 200,000 plus, with a much higher wage growth, then they would find it very difficult to resist a hike, probably in September, but definitely by December,” Mohamed El-Erian, Allianz SE’s chief economic adviser, said Friday in an interview on Bloomberg Television. “But that depends on getting such an employment report.”
Analysts surveyed by Bloomberg project the addition of about 180,000 jobs this month, after 255,000 in July, and they predict the unemployment rate nudging down to 4.8 percent, compared with 6.2 percent in August of 2014. The U.S. Labor Department releases the next payroll report on Sept. 2.
The MSCI All Country World Index of stocks extended its weekly drop to 0.8 percent, while the S&P 500 Index slipped 0.2 percent at 4 p.m. in New York. The American stock gauge posted its first back-to-back weekly drop in two months. Utilities and phone companies, among this year’s best performers, led the declines. About 6.6 billion shares traded hands on U.S. exchanges, 3 percent below the three-month average.
Ulta Salon Cosmetics & Fragrance Inc. sank the most since November as its current-quarter outlook disappointed. Autodesk Inc. jumped to a record after surprising investors with a quarterly profit, and forecasting a narrower-than-estimated loss in the current period.
The rally that drove the S&P 500 to a series of records since early July lost momentum amid the recent hawkish remarks from Fed officials and mixed economic data. Kansas City Fed President Esther George this week reiterated her call that higher rates are warranted, while Dallas Fed chief Robert Kaplan said “the case is strengthening” for another increase. They joined New York Fed chief William Dudley and his San Francisco counterpart John Williams who signaled last week a rate increase could be on the table in coming months.
The Stoxx Europe 600 Index extended its weekly advance to 1.1 percent. Among stocks moving on corporate news, Gemalto NV rallied as the software firm posted an increase in net profit and confirmed its gross margin forecast for the year. French media company Vivendi SA fell after reporting quarterly earnings that missed analyst estimates.
The benchmark U.S. 10-year note yield rose five basis points, or 0.05 percentage point, to 1.62 percent, according to Bloomberg Bond Trader data. Yields on two-year notes, the most sensitive to Fed expectations, climbed to 0.84 percent.
Thirty-year bonds outperformed as Yellen’s remarks bolstered traders’ view that the central bank will lift borrowing costs only slowly in the face of a U.S. economy that’s been hindered by signs of slowing growth abroad.
“The message was pretty balanced, in that she did indicate that we’re closer to raising rates, but at the same time, insinuated that the ultimate terminal rate should be a bit lower,” said Mike Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $325 billion. “It was definitely supportive of a flattening yield curve.”
Bloomberg’s Dollar Spot Index, which tracks the currency against 10 peers, rose 0.8 percent. The greenback fell before Fischer’s remarks as traders focused on Yellen’s comments that the central bank will take a gradual approach to tightening policy.
“Fischer really maintained the focus on the near-term, whereas Yellen was a bit more comprehensive across the cycle,” said Eric Theoret, a foreign-exchange strategist at Bank of Nova Scotia in Toronto. “That’s where the distinction lies. Yellen’s was a broader discussion, Fischer’s was very much a narrow, near-term discussion and because of that we did see that broad dollar rally.”
The greenback gained 0.8 percent to $1.1200 per euro, and added 1.2 percent to 101.77 yen.
Oil climbed 0.7 percent Friday, trimming a weekly loss. Saudi Arabian Energy Minister Khalid Al-Falih said an output freeze will signify that producers are content with the market situation. All oil and gas facilities in Saudi Arabia are safe and operating normally, Saudi Arabian Oil Co. said. A projectile from Yemen caused a fire in a power relay facility, state-run Saudi Press Agency reported.
West Texas Intermediate for October delivery rose 31 cents to settle at $47.64 a barrel on the New York Mercantile Exchange. Brent for October settlement increased 25 cents to $49.92 on the London-based ICE Futures Europe exchange. The global benchmark crude closed at a $2.28 premium to WTI.
Zinc rallied to a 15-month high in London on signs of an emerging shortage that’s made the metal the best-performing commodity this year. Prices in Shanghai surged to the highest since 2011. Zinc has outperformed all other members on the Bloomberg Commodity Index in 2016 amid speculation that dwindling mine production and buoyant demand will leave a shortfall of the metal, used to rustproof steel.
“The market is crazy and looks to be crazier,” Richard Fu, head of Asia and Pacific at Amalgamated Metal Trading Ltd. in London, said by e-mail. “The tight concentrate supply might produce a slow but steady bull market in the coming months.”
— With assistance by Maciej Onoszko, Katherine Chiglinsky, Nao Sano, Anooja Debnath, Andrew Reierson, Emma O'Brien, Anchalee Worrachate, Kevin Buckland, Christopher Condon, James Regan, Alan Soughley, Mark Shenk, Stephen Kirkland, Lananh Nguyen, David Goodman, Brian Chappatta, and Narayanan Somasundaram