Treasuries Fall on Services Growth as Oil Jump Spurs Stock Gains

  • Dollar caps longest rally versus yen since March on Fed bets
  • Asian index futures signal gains amid crude-driven rebound

ECB Said to Talk Taper at the Conclusion of QE

Bonds fell, while the dollar traded near a two-week high after data on services and manufacturing showed the U.S. economy is strong enough to keep the Federal Reserve on track to raise interest rates by year-end. Stocks climbed with oil.

Treasuries dropped for a fourth day in their longest decline in more than a month as a report showed service companies in the U.S. expanded at the fastest rate in almost a year. The dollar rose for a seventh day against the yen. Crude’s rally to almost $50 a barrel spurred gains in shares globally, with Brazil’s Ibovespa climbing the most among the world’s biggest equity markets.

Traders have been weighing the outlook for central banks against incoming economic data for clues as to the future of unprecedented stimulus measures. The Fed left its benchmark rate unchanged last month, noting the case for a hike strengthened while describing risks to the economic outlook as “roughly balanced.” Key jobs numbers at the end of the week are forecast to show a pickup in hiring, which could bolster the case for higher borrowing costs.

“As far as economic activity, the Fed has little excuse to not hike,” said Brian Jacobsen, chief portfolio strategist with Wells Fargo Funds Management LLC, which oversees $242 billion. “That was a big beat for the ISM non-manufacturing index. Not only was the ISM beat big, it was broad. Don’t rule out a November hike.”

For more on the U.S. economic data out Wednesday, click here.

Investors have gravitated toward riskier assets as supportive monetary policies spurred demand for higher-yielding investments. Central bank efforts have dragged down yields on global bonds, with $12 trillion now yielding less than zero, while pushing stocks in the U.S. to record highs. The combined size of the balance sheets of the world’s six major central banks has grown to $16 trillion from $6 trillion in 2008, according to Bianco Research.

Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, according to the International Monetary Fund. The situation complicates the task for policy makers, who have been urged to use fiscal policy to boost growth amid a waning ability to stimulate the economy.

Bonds

Ten-year Treasury yields rose two basis points, or 0.02 percentage point, to 1.70 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. Yields on two-year notes, the coupon maturity most sensitive to Fed expectations, climbed to a one-month high.

The benchmark Treasury yield dipped to a record-low 1.318 percent on July 6, when the market-implied odds of higher U.S. rates by December stood at just 12 percent. The probability has increased to 64 percent, according to Fed fund futures data compiled by Bloomberg. JPMorgan Chase & Co. says 10-year yields could climb as high as 2 percent this year.

“An improved growth outlook continues to bolster an outlook for higher interest rates in the fourth quarter,” JPMorgan strategists led by Jay Barry in New York wrote in a client note dated Oct. 4.

European debt extended its selloff, which started Tuesday after Bloomberg News reported policy makers will probably wind down bond purchases gradually before the conclusion of the region’s quantitative easing. Yields on Italy’s 10-year bonds surged to the highest level since June and those on Spain’s jumped above 1 percent for the first time in two weeks.

Stocks

MSCI’s global equity gauge halted a back-to-back slide, rising 0.2 percent as energy companies climbed with crude. The Ibovespa jumped 1.5 percent as oil company Petroleo Brasileiro SA rallied to an almost two-year high.

The S&P 500 Index added 0.4 percent to 2,159.73 after two days of losses following hawkish comments from Fed officials. ConocoPhillips and Transocean Ltd. paced a rally in energy companies as phone and utility shares retreated.

While investors are scrutinizing data for signs of stronger growth and preparing for another earnings season, they’re also keeping a close eye on signals from Fed policy makers. Chicago Fed President Charles Evans said the central bank will probably increase borrowing costs by the end of the year, joining calls from Cleveland Fed President Loretta Mester and her counterpart from Richmond, Jeffrey Lacker, to raise rates sooner rather than later.

“We’ve also had a lot of Fed talking heads out on the wire and really reinforcing the Fed’s desire to raise rates in December,” said Katie Nixon, chief investment officer of wealth management at Northern Trust Corp.

In Europe, stocks retreated on bets the ECB will turn less accommodative and as a report showed the region’s economy is losing steam. The Stoxx Europe 600 Index fell 0.6 percent, led by utilities, travel-and-leisure and real-estate companies. Banks rose.

Futures on Asian stock indexes signaled gains following losses outside of Japan and Hong Kong Wednesday. Nikkei 225 Stock Average futures gained 1.3 percent in Chicago amid the yen’s slide, while contracts on benchmarks in Australia and South Korea added at least 0.45 percent.

Currencies

The dollar gained 0.6 percent to 103.50 yen, touching its strongest level in about a month, while the Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, was steady at its highest level since Sept. 20. The index has rallied about 3 percent from this year’s low reached in May amid mounting wagers that the Fed will boost rates.

“If the Fed executes along the gradual path that it’s indicated, that should mean a slightly stronger dollar,” said Marc Bushallow, managing director of fixed income at asset manager Manning & Napier Inc. in Rochester, New York.  “November is probably more live than the market is pricing in, but December remains the base case.”

The pound rose for the first time in six days against the euro as traders speculated it had weakened too much amid speculation the U.K. is headed for a so-called hard Brexit.

Commodities

Oil climbed after government data showed that U.S. crude stockpiles slumped. Inventories dropped by 2.98 million barrels in the week ended Sept. 30, according to the Energy Information Administration. That contrasts with the 1.5 million barrel increase forecast by analysts surveyed by Bloomberg.

“This is the fifth-straight weekly decline in crude supplies, which is very supportive,” said Chip Hodge, who oversees a $12 billion natural-resource bond portfolio as a senior managing director at John Hancock in Boston.

West Texas Intermediate oil for November delivery rose 2.3 percent to $49.83 a barrel on the New York Mercantile Exchange.

Nickel touched a two-week low as concerns over supply restrictions eased. Zinc, copper and lead retreated in London, while tin and aluminum gained.

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