Stocks rally anew on U.S. rate cut hopes; dollar trades steady

A trader works inside a booth, as screens display Viking cruise company logo, on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 1, 2024. REUTERS/Stefan Jeremiah/File Photo

By Herbert Lash and Amanda Cooper

NEW YORK/LONDON (Reuters) – Global shares traded close to one-month highs on Tuesday, boosted by revived optimism the Federal Reserve cuts U.S. interest rates once if not twice this year, while a weaker yen offset by a stronger euro kept the dollar steady.

Signage for the London Stock Exchange Group is seen outside of offices in Canary Wharf in London, Britain, August 3, 2023. REUTERS/Toby Melville/File Photo

A U.S. jobs report last week that was weaker than economists had forecast and data showing the slowest growth in nearly two years the prior week sparked a dramatic swing in the outlook for when and by how much the Fed might cut rates.

Traders are now pricing in 45 basis points of Fed rate cuts by the end of 2024, with a first cut possibly in September, according to LSEG’s rate probability app. Traders had recently priced in just one cut due to sticky inflation data.

Passersby are reflected on an electric stock quotation board outside a brokerage in Tokyo, Japan April 18, 2023. REUTERS/Issei Kato/File Photo

The yield on benchmark 10-year Treasury notes slid to an almost a one-month low of 4.431%, while the dollar index, a measure of the U.S. currency against six peers, was off about 1.3% from nearly a six-month high on May 1.

“There’s been a lot of talk about the end of U.S. exceptionalism the last few days,” said Thierry Wizman, global FX and interest rates strategist at Macquarie in New York.

“Until we see strong underlying reasons to believe why the rest of the world should catch up and surpass the U.S., it doesn’t look like the trend of a weak dollar that we’ve seen in the last two weeks will persist,” he said.

The strength of the U.S. housing market and potentially stalled progress on inflation means monetary policy may be less restrictive than officials believe, Minneapolis Fed President Neel Kashkari said in an essay that raises the possibility prices are “settling” at a level above the Fed’s 2% target.

The renewed outlook for lower rates has increased the appetite for stocks and other riskier assets, such as bitcoin.

MSCI’s gauge of stocks across the globe gained 0.40%, its highest since April 10. On Wall Street, the Dow Jones Industrial Average rose 0.28%, the S&P 500 advanced 0.27% and the Nasdaq Composite added 0.16%.

In Europe, the pan-regional STOXX 600 index jumped 1.05% to a one-month high as UBS shares soared 8.8% after beating expectations.

Treasury yields slipped, with traders focused on absorbing $125 billion in new supply this week, while last week’s jobs report and comments by Fed Chair Jerome Powell spurred a rally.

Demand will be tested at an auction of $58 billion in three-year notes on Tuesday, followed by $42 billion in 10-year notes on Wednesday and $25 billion of 30-year bond on Thursday.

The 10-year Treasury fell 5.2 basis points to 4.437%, while the two-year note, which reflects interest rate expectations, slid 1 basis points to 4.812%.

“We found out late last week Powell & Co. really don’t have an appetite for raising rates and then the jobs number coming in a little bit softer than expected provided some needed fuel for a relief rally in the Treasury market,” said Kevin Flanagan, head of fixed income strategy at WisdomTree in New York.

Expectations of falling rates have weighed on the dollar, though only gently. European policymakers are readying cuts for June, capping the euro, and rates are not expected to move too far above zero in Japan this year, leaving a wide gap with the rest of the world.

The dollar index fell 0.02%, with the euro up 0.07% to $1.0775.

The yen, meanwhile, weakened 0.34% at 154.41 per dollar.

Traders estimate Japan spent almost $60 billion defending the yen last week.

Australia’s central bank left interest rates on hold, as expected, but the Aussie dollar slipped about 0.08% to $0.6619 after policymakers did not strengthen guidance around the risk of another rate hike.

Sterling eased 0.08% to $1.2551.

Oil prices steadied as weakness in the physical market and concerns about sticky U.S. inflation countered fears of escalation in the Middle East as Israel stepped up attacks in southern Gaza while a ceasefire deal hung in the balance.

U.S. crude recently fell 0.6% to $78.01 per barrel and Brent was at $82.82, down 0.61% on the day.

Spot gold dropped 0.3% to $2,316.33 an ounce.

Bitcoin last rose 1.56% to $64,147.00.

(Additional reporting by Tom Westbrook in Singapore; Editing by Bernadette Baum, Ed Osmond and Nick Zieminski)