Stocks end turbulent month higher as US data sets stage for rate cut

[August 31, 2024]  By Chibuike Oguh and Naomi Rovnick

NEW YORK/LONDON (Reuters) -Global stocks edged higher in choppy trading on Friday, making it the fourth consecutive month of gains despite a bout of heavy selling in early August, buoyed by U.S. economic data that has helped the dollar snap a weeks-long losing streak.

The U.S. personal consumption expenditures (PCE) price index - which is the Federal Reserve's preferred inflation measure - rose 0.2% in July, according to Commerce Department data released on Friday.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month, the report showed. The data sets the stage for the Fed to likely begin easing monetary policy from September.

The Dow Jones Industrial Average finished up 0.55% to 41,563.08, reaching the second consecutive record high close. Benchmark S&P 500 gained 1.01% to 5,648.40 and the Nasdaq Composite gained 1.13% to 17,713.62. For the month, the Dow finished up 1.8%, S&P 500 added 2.3%, and the Nasdaq gained 0.6%.Europe's Stoxx index closed up 0.09% after touching a record intraday high while Britain's FTSE 100 eased 0.04%. MSCI's world share index rose 0.77%, making it a 2.40% monthly gain.

The stunning recovery from an early August sell-off reminiscent of October 1987's "Black Monday" came as traders priced a so-called Goldilocks scenario, in which the U.S. economy keeps growing but not so much as to prevent interest rate cuts.

Money markets are confidently pricing the Fed's first 25 basis point cut of this cycle at its September meeting, with a 33% chance of a jumbo 50 bp reduction.

The U.S. economy grew faster than initially thought in the second quarter of this year because of strong consumer spending, and corporate profits, a report on Thursday showed.

"The last few days we've started out a little stronger and then drifted during the day and in many cases closed either break even or slightly positive or slightly negative," said Tom Plumb, chief executive and portfolio manager at Plumb Funds.

"I think that is a sign of a cycle where you start to see people transition to a different environment and it's not positive for the past leaders," he added, referring to the so-called "Magnificent 7" tech stocks that were at the forefront of this year's stock market rally.

Government bonds rallied in early August after a weaker-than-expected U.S. jobs report and a surprise Bank of Japan rate hike wreaked chaos in currency carry trades and drove heavy selling of risky assets.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., July 3, 2024. REUTERS/Brendan McDermid/File Photo

The yield on benchmark U.S. 10-year notes, which moves inversely to prices, rose 4.2 basis points on Friday to 3.909%. The 2-year note yield, which typically moves in step with interest rate expectations, rose 2.4 basis points to 3.9165%.

"As we're starting to lay out what our expectations are for an environment with lower interest rates, at least lower short term rates... we're already starting to see a change in the shape of the yield curve, which impacts the bond market but also the stock market," Plumb added.

EURO FLAT

The dollar steadied near a one-week high versus a basket of other major currencies, on track to snap a five-week losing streak although still heading for around a 2.5% monthly loss.

Against the yen, the dollar stood at 146.14, set to lose more than 2.5% for the month, as pressure eased on the Japanese currency on the prospect of narrowing interest rate differentials.

Core inflation in Japan's capital Tokyo accelerated for a fourth straight month in August, data showed on Friday, with the 2.4% price increase signalling further BoJ rate hikes ahead.

The euro was down 0.2% at $1.105, having declined on Thursday after softer-than-expected German inflation data increased bets on further European Central Bank rate cuts.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.48% and ended the month 2% higher. Japan's Nikkei, following its early August collapse, was down 1.16% for the month after rising 0.74% on Friday.

Oil prices fell. Brent crude futures for October delivery, which expire on Friday, settled 1.43% at $78.80 a barrel, marking a decline of 0.3% for the week and 2.4% for the month.

U.S. West Texas Intermediate crude futures settled down 3.11% to $73.55, a drop of 1.7% in the week and a 3.6% decline in August.

Gold prices weakened but looking at a 2.8% monthly gain. Spot gold lost 0.74% to $2,502.44 an ounce. U.S. gold futures settled 1.3% lower at $2,527.6 [GOL/]

(Reporting by Chibuike Oguh in New York and Naomi Rovnick in London; Editing by Kirsten Donovan and Aurora Ellis)

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