The dollar rose to a seven-month high and bonds fell after U.S. retail sales data bolstered the case for higher interest rates this year, while Federal Reserve Chair Janet Yellen’s speech did little to alter that view.
The greenback climbed against most of its major peers and Treasury yields rose to the highest level in four months after Yellen refrained to provide any clues on the timing of a hike and said the costs of low rates for too long may exceed benefits. American stocks almost wiped gains as a drop in oil sent energy shares lower. Banks rallied after earnings from JPMorgan Chase & Co. and Citigroup Inc. beat estimates.
Traders have been sifting through economic reports and remarks from policy makers for clues on the path of borrowing costs in the world’s largest economy. U.S. retail sales climbed in September by the most in three months while wholesale prices rose more than projected, data today showed. Boston Fed Bank President Eric Rosengren said the central bank may have to raise rates faster than the market forecasts. Pricing in federal funds contracts indicates roughly two thirds probability of a rate hike in December.
Stocks
Gains in global equities started in Asia after a report showing an increase in China’s factory-gate prices eased concern over a slowdown in the world’s second-largest economy. The report also lifted European shares.
The S&P 500 Index added less than 0.1 percent to 2,132.98 at 4 p.m. in New York, after rising as much as 0.8 percent. The CBOE Volatility Index fell for the first time in four days.
Brazilian stocks rallied on speculation that the central bank may lower borrowing costs next week after Petroleo Brasileiro SA surprisingly cut fuel prices. Thai stocks jumped the most since 2011 on prospects for a smooth transition following the death of King Bhumibol Adulyadej, the world’s longest reigning monarch.
Bonds
Benchmark U.S. 10-year note yields rose six basis points, or 0.06 percentage point, to 1.80 percent, according to Bloomberg Bond Trader data. The yield has climbed eight basis points this week. The difference between yields on two- and 30-year debt, a gauge of the yield curve, climbed to about 1.72 percentage point, the highest in almost a month.
Yellen pondered in the text of a speech to a Boston Fed conference whether a “high-pressure economy” could boost areas like labor-force participation. Her remarks come just two days after minutes of the Fed’s September policy committee meeting showed “several” of the majority who supported the decision to hold rates steady said it was a “close call.”
“She talks about the merit in letting the economy run hot temporarily — that is dovish,” said Priya Misra, head of global interest-rate strategy in New York at TD Securities (USA) LLC. “The Fed seems to be in the midst of a debate about undershooting on the unemployment rates — Yellen seems to be more in the camp advocating for the undershooting. That should argue for a steepener and higher inflation risk premiums.”
U.K. 10-year bonds tumbled, pushing the yield to the highest level since Britain voted to leave the European Union.
Currencies
Bloomberg’s Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.4 percent. The greenback added 0.4 percent to 104.16 yen, extending its longest weekly rally versus the Japanese currency since May.
The dollar will move “sideways to firmer” in the fourth quarter, said Win Thin, global head of emerging markets at Brown Brothers Harriman & Co. in New York. “The run-up to the Fed rate hike should keep it firm.”
In an interview with CNBC, Rosengren said the market’s pricing on a December rate increase is about right, and he’s concerned about overshooting on unemployment and having to tighten faster. Rosengren was among three voters on the Federal Open Market Committee to dissent against the panel’s Sept. 21 decision to leave the benchmark interest rate in a range of 0.25 percent to 0.5 percent.
The pound fell 0.5 percent, taking its decline this month to about 6 percent, on concern over the impact of Britain’s plan to exit the European Union.
Commodities
Oil retreated as the dollar advanced and U.S. crude stockpiles climbed for the first time since August.
“The dollar is near a seven-month high, which puts some pressure on crude,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “Crude supplies rose last week. Even though the product supplies and Cushing were up, the report is basically bearish for crude oil.”
West Texas Intermediate oil for November delivery declined 0.2 percent to $50.35 a barrel on the New York Mercantile Exchange. Brent for December settlement fell 8 cents to $51.95 a barrel on the London-based ICE Futures Europe exchange. The global benchmark closed at a $1.20 premium to WTI for the same month.
Gold held near a four-month low as investors focused on the likelihood of higher U.S. interest rates. Holdings in exchange-traded funds increased to the highest since 2013.
Bloomberg: October 14, 2016
