Markets Wrap: Bond Prices Drop as Traders Adjust Fed Rate Cut Expectations

A sell-off in Treasuries has strengthened the dollar and left equities mixed as new signs of economic strength have led traders to lower their expectations for US rate cuts.

In Japan, shares rose with the help of a weaker yen, while equities in Australia and South Korea fell. US futures remained flat after the S&P 500 pulled back from an intraday record on Thursday to end the session relatively unchanged.

Swaps traders have further reduced their bets on Federal Reserve rate cuts in the remaining two meetings of the year. Treasuries remained steady after a jump in yields on Thursday pushed an index of dollar strength higher for a fourth session to a level not seen since early August. Australian and New Zealand yields climbed early on Friday, following the same trend.

The change in forecasts reflects robust US retail sales in September that exceeded expectations, demonstrating resilient consumer spending that continues to drive the economy. This data comes after a strong jobs report and a consumer inflation print earlier this month that suggested the US is far from a recession.

Matthew Weller at Forex.com and City Index said, “There’s a narrow path toward a Fed pause in November, but it would likely require every notable economic report between now and then to indicate a stronger-than-assumed US economy. Regardless of what the Fed does in November, the projected path for interest rates looking out into 2025 and beyond is higher than it’s been in weeks.”

In Asia, investors will be closely watching China, as GDP data for the third quarter is expected to show the slowest pace of growth in six quarters. Home prices, industrial production, and retail sales data are also set to be released on Friday, providing more clarity for investors dealing with economic support measures that have caused Chinese equities to swing.

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Elsewhere in the region, headline inflation in Japan rose as expected to 2.5%. The yen weakened moderately after surpassing the psychological level of 150 per dollar on Thursday, bringing the risk of official intervention back into focus.

In corporate news, US-listed shares in Taiwan Semiconductor Manufacturing Co. reached a record high after the company exceeded quarterly estimates and raised its target for 2024 revenue growth. This positive outlook also boosted Nvidia Corp shares, causing them to rally.

A series of stronger-than-expected data points have pushed the US version of Citigroup’s Economic Surprise Index to its highest level since April. The gauge measures the difference between actual releases and analyst expectations.

Ellen Zentner at Morgan Stanley Wealth Management said, “Strong data will encourage some pushback from Fed participants to cutting again in November, but Chair Jerome Powell is unlikely to be swayed from forging ahead with steady, quarter-point moves.”

Jeff Roach at LPL Research stated that strong consumer spending in September suggests economic growth in the previous quarter was well above trend. Looking ahead, investors need to monitor any signs that the unemployed are finding it more difficult to earn a paycheck.

“Retail sales came in well above expectations and continue to defy the weak economy thesis,” said Quincy Krosby at LPL Financial. “The implications for monetary policy center on whether the Fed worries that the renewed strength in the economy fuels an uptick in inflation, although expectations remain that there will be a 25 basis-point cut at the next meeting.”

In commodities, gold reached a new record amid ongoing tensions in the Middle East, while West Texas Intermediate, the US crude price, edged higher to trade around almost $71 per dollar.

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Key events this week:

China GDP, Friday

US housing starts, Friday

Fed’s Christopher Waller, Neel Kashkari speak, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures were little changed as of 9:19 a.m. Tokyo time

Hang Seng futures fell 0.3%

Japan’s Topix rose 0.6%

Australia’s S&P/ASX 200 fell 0.7%

Currencies

The Bloomberg Dollar Spot Index was little changed

The euro was little changed at $1.0830

The Japanese yen rose 0.1% to 150.04 per dollar

The offshore yuan was little changed at 7.1348 per dollar

Cryptocurrencies

Bitcoin rose 0.5% to $67,290.99

Ether rose 0.2% to $2,601.45

Bonds

The yield on 10-year Treasuries was little changed at 4.09%

Japan’s 10-year yield advanced one basis point to 0.970%

Australia’s 10-year yield advanced six basis points to 4.30%

Commodities

This story was produced with the assistance of Bloomberg Automation.

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