U.S. Stocks Hit Records, Fed Talk Weighs on Bonds: Markets Wrap

Updated on
  • Trump, Mnuchin said to have met with Kevin Warsh on Fed chair
  • Gold and copper retreat, dollar bounces slightly lower

Latitude Sees Political Risk as Diminished Worry

U.S. stocks surged to all-time highs while Treasuries slumped amid reports that President Donald Trump and Treasury Secretary Steven Mnuchin met with former Federal Reserve governor Kevin Warsh to discuss the role of Fed chair.

The S&P 500 Index, Nasdaq Composite Index and Russell 2000 Index all set records, with the S&P 500 closing out its eighth straight quarterly gain. Trump, who also reportedly met with former Fed governor Jerome Powell, said he expects to make a decision on the central bank’s leadership in two to three weeks.

Financial shares, which would stand to benefit from Warsh’s views on deregulation, helped spearhead the stock market gains as the KBW Bank Index leaped to the highest since March.  But despite the enthusiasm, some investors predicted that Warsh’s nomination would hurt equities.

“I don’t think a Warsh nomination would bring confidence to the markets and would expect equities to sell off if he was announced,” Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC, wrote in a note to clients Friday. “Normally, the FRB staff assumes the chair knows the ins and outs of monetary economics at least as well as they do. Warsh would not be afforded that assumption. That is a big problem.”

Prior to the Fed news, Treasuries and the dollar dropped as the PCE core deflator, a key gauge of inflation, rose less than economists expected, deepening concern about the stickiness U.S. consumer prices and what it could mean for an expected interest rate hike this year. Personal spending also cooled.

“Inflation data today was weak, but Janet Yellen was pretty adamant when she spoke that they’re going to remain on course, and even though the numbers missed expectations today the headline number is still the same level, so it’s not a big downtick,” Michael O’Rourke, chief market strategist at JonesTrading Institutional Services LLC, said by phone. “It’s not optimal to keep policy on course, but it’s not enough to knock policy off course.”

White House National Economic Council Director Gary Cohn discusses President Donald Trump’s tax plan.

Daybreak: Americas. (Source: Bloomberg)

European shares closed out their best month of the year. European government bonds rebounded. Emerging-market assets rallied, with stocks rising and most currencies strengthening against the greenback.

Data out of Europe underscored the region’s economic recovery. German unemployment fell to a record low in September, providing encouragement for the European Central Bank as it contemplates reducing asset purchases in coming months. Euro-zone inflation undershot estimates, though not by much. The U.K.’s benchmark stock index was buoyed by data showing that British consumers are in better shape than previously thought.

Terminal subscribers can read more in our Markets Live blog.

What to watch out for prior to the weekend:

  • Chinese markets will be shut next week for a holiday.
  • South Korea’s markets will be closed next week as well.

Here are the main moves in markets:

Stocks

  • The S&P 500 gained 0.4 percent to a record 2,519.35, putting the benchmark up 3.7 percent for the quarter.
  • The Nasdaq Composite surged 0.7 percent, bringing its quarterly increase to 6.3 percent, while the Russell 2000 rose 0.1 percent on the day and 4.5 percent for the quarter. Both gauges hit all-time highs.
  • The Stoxx Europe 600 Index jumped 0.5 percent, reaching the highest since June. 
  • The MSCI All-Country World Index bounced 0.4 percent. 

Currencies

  • The Bloomberg Dollar Spot Index fell less than 0.1 percent. 
  • The euro rose 0.3 percent to $1.1819. 
  • The British pound declined 0.3 percent to $1.3401. 
  • The MSCI Emerging Markets Currency Index gained 0.2 percent, the first advance in a week.

Bonds

  • The yield on 10-year Treasuries rose by three basis points to 2.3354 percent. 
  • Germany’s 10-year yield declined two basis points to 0.462 percent. 
  • Britain’s 10-year yield decreased one basis point to 1.365 percent.

Commodities

  • West Texas Intermediate crude was little changed at $51.57 a barrel. 
  • Gold retreated 0.6 percent to $1,280.28 an ounce.
  • Copper fell 0.9 percent to $2.9545 a pound.

— With assistance by Sarah Ponczek, and Luke Kawa

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