Dollar set for worst month in a year, yields hold: Markets wrap

The dollar extended its losing streak and Treasuries steadied after a rally on further bets the Federal Reserve is almost done with its rate-hiking cycle.

The greenback fell for a fourth day and is headed for its worst month since last November as traders turned more optimistic about the likelihood of Fed rate cuts. The South Korean won and Thai baht led the gains in Asia, with the won jumping the most in nearly two weeks.

Treasuries were little changed after a rally in the previous session, when the yield on the two-year note, which is sensitive to the Fed’s rate path, fell to the lowest in a week. Benchmark 10-year yields had also dropped eight basis points to around 4.4% Monday.

Wall Street forecasters have turned more upbeat about the outlook for next year as investor sentiment improves and expectations of a recession are dialed back. Bets that US policymakers are done with rate hikes have also fueled a rally in the S&P 500 this month, sinking short-term volatility expectations.

The July rate hike was probably the Fed’s last, according to Liz Ann Sonders, chief investment strategist at Charles Schwab.

“But I always say, be careful what you wish for,” she said on Bloomberg Television. “If the market is right in expecting that rate cuts could start maybe even at the end of the first quarter, in the first half, that would require to some degree a weaker economic and labor market backdrop than what we’re seeing right now.”

The Bloomberg US Treasury Index recently shifted to a positive return for the year as signs of slowing inflation and measured jobs growth unleashed a rally that sent yields tumbling from their highest in more than a decade. Swaps data shows investors are pricing in around 95 basis points of Fed rate cuts from the January meeting into the end of next year.

Stocks in Asia rose, with benchmarks in Korea, Taiwan and Australia gaining. Japanese equities declined as the yen extended its advance following Treasuries rally, while Hong Kong shares also fell. Contracts for European and US equities were little changed.

Australia and New Zealand bonds tracked Monday’s rally in Treasuries. Elsewhere, Japan’s auction of 40-year government bonds saw the bid-to-cover ratio drop to a 20-month low, suggesting weak demand.

Better returns

More than 60% of respondents in the latest MLIV Pulse survey expect stocks to provide better returns than bonds over the next month. That’s the highest level of excitement about equities that the survey registered since the question about the two assets was first asked in August 2022.

Traders will be closely watching another batch of economic data this week, including the Fed’s preferred measure of underlying inflation. US sales of new houses fell in October after a downward revision to the prior month as decades-high mortgage rates weighed on demand. The Fed Bank of Dallas manufacturing index for November came in softer than expected.

Investors may continue to see “fairly favorable” data from the US inflation numbers, according to Shane Oliver, head of investment strategy at AMP.

“But by the same token, the Fed has expressed concern that inflation is still well above the 3% target,” he said on Bloomberg Television. “The Fed may well go through another round of pushback against the implied easing and financial conditions that we’ve seen with the rally in bonds and shares.”

In earnings, Crowdstrike Holdings Inc. will underscore how businesses are prioritizing cybersecurity after recent high-profile corporate hacks, while Salesforce and Dell Technologies are expected to post slower sales growth when they report this week, as overall corporate expenditure tightens.

Government debt sales in the US on Monday were met with mixed reactions, with a $55 billion auction of five-year bonds seeing strong demand while a $54 billion sale of two-year notes was soft.

Elsewhere, gold was little changed, hovering near the highest level since May, supported by a slump in Treasury yields and bets that the Fed will start cutting interest rates. Oil extended its decline after a string of losses as the market weighed the possibility of deeper output cuts from OPEC+ against signs supply is running ahead of demand.

Key events this week:

Meeting of NATO foreign ministers in Brussels, Tuesday-Wednesday
ECB governing council member Pablo Hernandez de Cos and Bank of England Deputy Governor Dave Ramsden speak, Tuesday
US Conference Board consumer confidence, Tuesday
Fed Governor Chris Waller speaks, Chicago Fed President Austan Goolsbee speak, Tuesday
New Zealand rate decision, Wednesday
OECD releases biannual economic outlook, Wednesday
Eurozone economic confidence, consumer confidence, Wednesday
Bank of England Governor Andrew Bailey speaks, Wednesday
US wholesale inventories, GDP, Wednesday
Cleveland Fed President Loretta Mester speaks, Wednesday
Fed releases its Beige Book, Wednesday
China non-manufacturing PMI, manufacturing PMI, Thursday
OPEC+ meeting, Thursday
Eurozone CPI, unemployment, Thursday
US personal income, PCE deflator, initial jobless claims, pending home sales, Thursday
China Caixin Manufacturing PMI, Friday
Eurozone S&P Global Manufacturing PMI, Friday
US construction spending, ISM Manufacturing, Friday
Fed Chair Jerome Powell to participate in “fireside chat” in Atlanta, Friday
Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures were little changed as of 6:30 a.m. London time. The S&P 500 fell 0.2%
Nasdaq 100 futures were little changed. The Nasdaq 100 fell 0.1%
Euro Stoxx 50 futures were little changed
Japan’s Topix index fell 0.2%
Hong Kong’s Hang Seng Index fell 1%
China’s Shanghai Composite Index was little changed
Australia’s S&P/ASX 200 Index rose 0.4%