U.S. Stocks Rally on Spending Bounce as Strong Dollar Hits Crude
The S&P 500 Index rebounded from a three-day slide, and the dollar advanced against most of its major peers. The extra yield offered on 30-year bonds over two-year notes shrank to the least since 2007, indicating traders are betting on higher borrowing costs. Crude slipped amid doubt producers will agree on a deal to stabilize prices when suppliers meet for informal talks next month. Brazil’s Ibovespa extended the world’s biggest advance this year on speculation President Dilma Rousseff will be permanently removed from office.
American equities snapped a three-day decline after a report showed consumer spending in the U.S. rose for a fourth straight month in July, bolstered by stronger income gains. The strong data followed disappointing retail sales and sluggish economic growth figures. Monthly jobs data on Friday may provide more clues as to whether policy makers have room to boost rates after Federal Reserve Chair Janet Yellen said the case for a hike is getting stronger. Meanwhile, central bankers in Europe and Japan used the Jackson Hole conference at the weekend to reaffirm their commitment to supporting their economies.
“There are good indicators that incomes are improving and consumption is going to continue to stay strong, which points to a resilient U.S. economy,” said Brian Jacobsen, chief portfolio strategist with Wells Fargo Funds Management LLC, which oversees $242 billion. “The big question is whether inflation is going to break higher or continue like this — it puts more emphasis on Friday’s employment report. It’s still a pretty murky picture right now.”
Fed fund futures indicate a 34 percent chance that the Fed will raise rates next month, up from 22 percent on Aug. 19 and zero in late June – after the U.K. voted to leave the European Union. The odds of an increase in U.S. borrowing costs by December have risen to 61 percent from a low of 8 percent reached June 27.
The Stoxx Europe 600 Index retreated 0.2 percent, paring earlier losses. A gauge of auto makers posted the biggest decline, while the decline in oil prices dragged energy producers lower. The volume of shares changing hands was 73 percent below the 30-day average given U.K. markets were closed for a holiday.
The MSCI Emerging Markets Index fell 0.6 percent as Turkish and Russian shares slumped. The Ibovespa gained 1.6 percent amid optimism Acting President Michel Temer, who will stay on as the nation’s leader if the Senate decides to impeach Rousseff, will be able to restore confidence in Latin America’s biggest economy.
Futures on Asian stock indexes outside of Japan foreshadowed gains for Tuesday, with contracts on Australia’s S&P/ASX 200 Index up 0.3 percent with those on the Kospi index in Seoul. Futures on Hong Kong’s Hang Seng and Hang Seng China Enterprises indexes climbed at least 0.3 percent along with contracts on the FTSE China A50 Index.
Nikkei 225 Stock Average futures slipped 0.2 percent in Osaka, before yen-denominated contracts traded in Chicago rose 0.7 percent.
The extra yield earned on 30-year bonds over two-year notes shrank to 1.40 percentage points on Monday. History suggests that a Fed rate increase supports longer-maturity bonds more than short-dated obligations as higher borrowing costs help stem inflation and keep the economy from overheating.
Two-year Treasury yields fell four basis points, or 0.04 percentage points, to 0.81 percent Monday, according to Bloomberg Bond Trader data. The 30-year yield dropped seven basis points to 2.22 percent, while yields on benchmark 10-year notes slipped to 1.56 percent.
Yellen’s speech at the Jackson Hole gathering on Friday shifted the spotlight to this week’s August labor report, which is projected to show employers added 180,000 jobs to nonfarm payrolls, following a gain of 255,000 in July.
“They’re likely to tighten in September, at least as long as the jobs number comes in OK,” Michael Pond, head of global inflation market strategy at Barclays Capital Inc. in New York, said on Bloomberg Television. “Hawkish Fed rhetoric has certainly increased recently. It’ll take a decent number, like 200,000, for them to go.”
The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, gained 0.1 percent after surging 0.8 percent on Friday. The dollar added 0.1 percent to $1.1189 per euro, and gained the same amount to 101.92 yen.
Sentiment among currency investors has shifted back and forth in recent weeks on how aggressive the Fed will be at a time when central banks in other developed economies continue to favor increased stimulus measures.
“Dollar appreciation is likely to resume over the balance of the year,” Atul Lele, who manages $2 billion as chief investment officer of Nassau, Bahamas-based Deltec International Group, wrote in a note to clients. “The factors that are contributing to the strong cyclical and secular U.S. dollar outlook remain,” including economic growth and the nation’s divergent monetary policy from other central banks.
The MSCI Emerging Markets Currency Index fell 0.7 percent, with South Korea’s won sliding 1 percent, while the Brazilian real jumped 1.1 percent. The rand slipped to a six-week low against the dollar as increased political risk in South Africa weighed on the currency.
The Bloomberg Commodity Index retreated for a fourth day as the greenback’s advance curbed the appeal of dollar-priced raw materials as an investment.
West Texas Intermediate crude for October delivery dropped 1.4 percent to $46.98 a barrel on the New York Mercantile Exchange.Oil entered a bull market Aug. 18, less than three weeks after tumbling into a bear market, as prices surged partly on speculation that discussions among members of the Organization of Petroleum Exporting Countries may lead to action to stabilize the market. An output freeze was proposed in February, but talks in April ended with no final accord. For a second week, money managers slashed bets on falling WTI prices by a record.
“The short-covering rally has come to an end,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “There are two reasons for this: the likelihood of an agreement to freeze output is becoming less-and-less likely all the time and the dollar’s relative strength.”
Copper and nickel fell at least 0.2 percent in London, while zinc jumped 0.7 percent. Gold futures touched their lowest level in more than a month amid the speculation U.S. rates could be increased as soon as next month.