LDN - Business

Bond yields creep higher as markets wait for Fed signals

[July 10, 2019] By Marc Jones

LONDON (Reuters) - Shares were treading water on Wednesday while rising Treasury yields kept the dollar steady, as investors waited to hear whether the world's most powerful central banker would confirm or confound expectations for a U.S. rate cut this month.

MSCI's broadest index of world stocks <.MIWD00000PUS> was trying to shake off three days of modest losses, though a muted morning for Europe and lower Wall Street futures markets underscored the pre-event caution.

London's FTSE <.FTSE> bobbed in and out of the green, Paris <.FCHI> rose after better-than-expected French industrial data. Germany's DAX <.GDAXI> lagged with a loss of 0.1%. [.EU]

Japan's Nikkei <.N225> had also finished lower and Chinese blue chips <.CSI300> barely budged as data showed inflation remained stubbornly subdued.

A worrying lack of inflation globally is one reason investors are counting on Federal Reserve Chair Jerome Powell to sound suitably dovish when he testifies to Congress on Wednesday.

Futures <0#FF:> still price in a 25-basis-point cut at the Fed's July 30-31 meeting, but they no longer suggest a half-point move. They had implied a 25% probability of an aggressive cut before an upbeat U.S. jobs report on Friday. <FEDWATCH>

"I think the market seems to be veering towards a less dovish message from Powell than was the prevalent a couple of weeks ago," said Bank of New York Mellon senior strategist Neil Mellor.

He still thought the Fed would cut by 25 basis points this month -- the first U.S. cut since the financial crisis -- but whether it would keep going was much less clear.

"The real interest is what happens thereafter," Mellor said. "If we are talking about a stronger dollar, then we have to bear in mind comments from President Donald Trump last week, who said, 'Well, perhaps we should start manipulating the dollar.'"

Overnight, Atlanta Fed President Raphael Bostic said the central bank was debating the risks and benefits of letting the U.S. economy run "a little hotter."

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The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville

Meanwhile, U.S. and Chinese trade officials held "constructive" talks on trade by phone on Tuesday, White House economic adviser Larry Kudlow said.

Wall Street had been duly circumspect, with the Dow <.DJI> ending down 0.08%, while the S&P 500 <.SPX> added 0.12% and the Nasdaq <.IXIC> 0.54%.

A LITTLE MORE YIELD

The cooling in U.S. rate fever has seen bonds give back just a little of their rally. Yields on two-year Treasuries rose <US2YT=TWEB> to 1.917% from their recent low of 1.696% and Europe's benchmark yields up around five basis points.

That in turn has helped the dollar index against a basket of currencies rebound to 97.500 <.DXY> from a June low of 95.843.

The dollar also gained to 108.92 yen <JPY=>, though the French data helped the euro recover to $1.1225 <EUR=>, still down from its $1.1412 of just a couple of weeks ago. [/FRX]

The Mexican peso <MXN=> began to recover after sliding on Tuesday when Finance Minister Carlos Urzua suddenly resigned, citing "extremism" in economic policy.

The Canadian dollar <CAD=> was on the defensive before a Bank of Canada meeting, in case policymakers tried to slow the currency's recent rally. <CAD/>

Gold fell 0.3% to $1,393.68 per ounce <XAU=> as the dollar gained.

Oil prices rose on Middle East tensions and news that U.S. stockpiles fell for a fourth week in a row. [O/R] Brent crude <LCOc1> futures gained 64 cents to $64.80. U.S. crude <CLc1> was up 82 cents to $58.65 a barrel.

(Reporting by Marc Jones, editing by Larry King)

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