Traders have ramped up Fed rate cut bets, pinning the dollar near multi-week lows, while a global stock rally pauses as investors await data on US producer prices that might show how tariffs are affecting inflation trends.
MSCI’s global share index flatlined on Thursday after hitting record peaks for the two previous sessions, while an equivalent gauge of Asian equities outside Japan lingered near its loftiest level since September 2021.
Futures markets signalled Wall Street stocks were set for a muted start, having led global shares higher all week and hitting records on Tuesday and Wednesday.
This blistering global rally has been fuelled by strong US tech earnings and speculation that Federal Reserve rate cuts will help protect businesses and households from the impact of White House tariffs.
Traders see a September cut as almost certain, per CME’s FedWatch tool, and the US administration continues to pressure the Fed to ease more quickly.
Treasury Secretary Scott Bessent said on Wednesday that the Fed funds rate, which has been in a range of 4.25 per cent to 4.5 per cent since December, should be as much as 175 bps lower.
Monthly US jobs data came in surprisingly weak on August 1, but a US producer prices report on Thursday could shift the market’s focus towards the risks of tariffs taking inflation too high for the Fed to cut rates.
About 70 per cent of global investors expect US stagflation to become the dominant market narrative within three months, a Bank of America survey found.
“Inflation is starting to come through. It’s not massive yet but that could certainly continue in coming months and amplify that part of the story,” Russell Investments global chief investment strategist Paul Eitelman said.
US Treasury markets show investors are growing queasy about the damage higher-for-longer inflation could wreak on longer-dated debt, by eroding the real value of bonds’ fixed-interest coupons over time.
Two-year Treasury yields traded at 3.67 per cent on Thursday, down from about 3.95 per cent at the beginning of August.
But yields on 30-year Treasuries, which are the most sensitive to inflation expectations, are 112 bps higher than the two-year notes, with the yield differential having risen from about 95 bps on August 1.
The US dollar was struggling to make headway from a two-week low against a basket of major currencies on Thursday and Japan’s yen made broad based gains, hitting its strongest in three weeks at 146.38 per dollar.
This came after Bessent said the Bank of Japan would raise interest rates because it was behind the curve in dealing inflation risks.
The BOJ has justified keeping borrowing costs ultra-low because its underlying inflation measure that focuses on domestic demand and wages is below its target and it wants more clarity on how US tariffs will affect exporters.
The euro stood at $US1.16722, nudging off the previous day’s two-week high while European government debt largely tracked moves in Treasuries.
Germany’s 10-year yield was down 2 bps at 2.66 per cent.
Commodities markets were subdued before Friday’s summit between US President Donald Trump and his Russian counterpart Vladimir Putin.
Trump on Wednesday threatened “severe consequences” if Putin did not agree to peace in Ukraine and has also floated the idea of a second summit that would include Ukrainian President Volodymyr Zelenskiy.
Brent crude, the global oil marker, traded about $US65.86 a barrel on Thursday, just off a two-month low and down from almost $US70 in early August.
Spot gold prices, which tend to rise when investors focus on geopolitical risks, fell about 0.5 per cent to $US3,3925 per troy ounce.
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