Treasuries Extend Selloff as Fed Bets Boost Dollar; Gold Slumps

  • Greenback caps longest rally against the yen since 2014
  • Japanese, Australian index futures rise as payrolls loom

El-Erian: Fed Has Been Overly Data Dependent

Treasuries posted their longest slide since April, while the dollar rose, amid mounting speculation the Federal Reserve will hike borrowing costs this year. Gold tumbled as oil rallied.

Traders pushed down the value of government debt for a fifth day after data showed further strengthening of the U.S. labor market ahead of a key jobs report. The dollar climbed against its major peers, posting the longest advance against the yen since 2014 and spurring a slump in gold. American equities erased a morning slide after a European Central Bank official said the institution is still in an “accommodative mode.” Oil topped $50 a barrel.

Bond traders bolstered their bets on higher U.S. interest rates after data showed filings for unemployment benefits dropped to an almost four-decade low, coming after reports pointing to an improvement in the services and manufacturing industries. While Friday’s payrolls data is forecast to reinforce that picture, investors will keep a close eye on any substantial increase in wages. Movement in salaries is seen as a leading indicator of inflation, which is firmly on investors’ radars after the recent recovery in oil prices.

“There is a lot of optimism priced into the market especially when it comes to the jobs,” said Kevin Kelly, chief investment officer at Recon Capital Partners LLC in Greenwich, Connecticut, which oversees $350 million. “We should get some solid numbers tomorrow that could reinforce a Fed rate hike going into December,” he said, referring to the payrolls numbers.

U.S. employers added 172,000 jobs in September, according to estimates in a Bloomberg survey, an increase from a three-month low reached in August. A Bloomberg index tracking economic surprises in the U.S. turned positive Wednesday for the first time since August, meaning that more reports are beating forecasts. The market-implied probability of a hike by year-end has risen to 64 percent, while the chance of an increase in November has climbed to 24 percent from 17 percent at the start of this week.

To read more about the U.S. labor market, click here.

Central-bank officials set to speak Friday include Cleveland Fed President Loretta Mester, who said this week that the case for a rate increase would still be “compelling” when the Fed Open Market Committee meets Nov. 1-2. Fed Vice Chairman Stanley Fischer, Governor Lael Brainard and Kansas City Fed President Esther George are also scheduled to appear at the Institute of International Finance’s annual meeting in Washington.

Bonds

Ten-year Treasury yields rose four basis points, or 0.04 percentage point, to 1.74 percent as of 4 p.m. in New York. The extra yield investors get for holding two-year notes instead of similar-maturity German or U.K. debt increased to the highest in at least a decade, reflecting the Fed’s status as the only major central bank contemplating a hike this year.

A Treasury-market gauge of inflation expectations over the next decade known as the break-even rate rose to 1.66 percentage points, the highest level since May, according to data compiled by Bloomberg. The Fed targets a 2 percent inflation rate.

“The U.S. has imported a lot of monetary stimulus thanks to the QE policies of the BOJ and the ECB, so the curve has been particularly flat and I think the Fed will have to compensate in the coming quarters as inflation picks up,” Francesco Garzarelli, London-based co-head of global macro and markets research at Goldman Sachs Group Inc., said in an interview on Bloomberg Television.

Ten-year gilt yields jumped the most in almost a month amid speculation the pound’s tumble to a three-decade low will fuel faster inflation and dissuade the Bank of England from adding to stimulus by cutting rates or boosting asset purchases.

France’s 50-year securities climbed the most in two weeks after the nation auctioned more of its longest bonds at a record-low average yield of 1.43 percent. Germany’s benchmark 10-year bund yield was little changed at minus 0.018 percent.

Stocks

The S&P 500 Index rose 0.1 percent to 2,160.77, erasing a 0.4 percent drop from earlier in the day. Apple Inc. rose for a third session to lead technology shares higher and Whole Foods Market Inc. rallied on takeover speculation. Mylan NV sank as drugmakers weighed on the health-care group, with lawmakers continuing to pressure the company over prices for its EpiPen allergy device. Utilities extended their longest losing streak in 14 years.

Speculation about the future of ECB stimulus is creating a rift in the European equity market. While lenders posted their biggest three-day gain in a month following a Bloomberg News report that the ECB has had discussions about how to end its asset-purchase program, the Stoxx Europe 600 Index fell for a second day.

ECB Vice President Vitor Constancio said in an interview with Market News that the institution is waiting for the consolidation of a sustained path of inflation, which will likely be “well above 1 percent” by the northern hemisphere spring, he said.

Most Asian index futures signaled gains to end the week, with contracts on the Nikkei 225 Stock Average climbing 0.2 percent in Osaka. Futures on equity gauges in Australia and South Korea advanced, while those on Hong Kong benchmarks retreated. Markets in mainland China are shut for holidays all week.

Currencies

The Bloomberg Dollar Spot Index, which measures the currency against a basket of 10 peers, added 0.5 percent as the greenback rose 0.4 percent to 103.95 yen. The currency also advanced 0.5 percent to $1.1148 per euro.

“The greenback has been benefiting from less pessimism, rather than outright optimism, at this point and another strong payrolls result boosts the case for a hike in the coming months,” said Bipan Rai, a senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce in Toronto.

The pound tumbled against every major currency, setting a new 31-year low versus the dollar, as concerns grew about the impact of a so-called hard Brexit on the U.K. economy.

The MSCI index of emerging-market currencies declined 0.1 percent, dropping for a third day.

Commodities

Oil climbed above $50 a barrel in New York for the first time since June as declines in U.S. crude inventories and OPEC’s pledge to reduce supply fueled bets the global glut may ease.

“The main issue is the big decline in North American storage,” said Tim Pickering, founder and chief investment officer of Auspice Capital Advisors Ltd. in Calgary. “The OPEC agreement is just spin to help support the market.”

West Texas Intermediate crude for November delivery rose 1.2 percent to $50.44 a barrel on the New York Mercantile Exchange, its highest close since June 9.

The dollar’s rally sent gold tumbling below its 200-day moving average -- a technical level used by chart watchers to predict future moves. The precious metal has lost at least 7 percent within about two months on two occasions when it fell below the measure in 2014 and 2015. Gold for immediate delivery sank 1 percent on Thursday, its eight day of losses.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE