For the second consecutive day, Treasury yields fell as traders recalibrated their expectations regarding potential US interest rate cuts and assessed risks associated with the impending presidential election. Yields on Australian and New Zealand bonds also dropped, while the dollar remained stable, positioning itself for a fourth straight weekly gain.
Earlier this week, a sharp rise in Treasury yields prompted a risk-off sentiment across markets as investors tempered their expectations for Federal Reserve rate cuts. Upcoming economic data, including the monthly payrolls report, is anticipated to provide greater clarity, particularly as polls indicate a tight race between Donald Trump and Kamala Harris in critical swing states.
Carie Li, global market strategist at DBS Bank Hong Kong, stated on Bloomberg Television, “We have seen this upward movement in US Treasury yields actually supporting the dollar index. Post-election, we still expect the dollar index to trend lower as we anticipate further interest rate cuts from the Fed, regardless of the winner.”
The yen remained stagnant against the dollar ahead of this weekend’s election, which may result in Japan’s ruling coalition losing its majority in the lower house of parliament for the first time since 2009. Strategists warn that such a scenario could weaken the yen and negatively impact Japanese stocks.
Bank of Japan Governor Kazuo Ueda indicated that the central bank is unlikely to raise interest rates in its upcoming meeting, with most observers already predicting no policy changes this month. Ueda’s remarks followed a recent dip in the yen to its lowest level against the dollar since July 31.
In a broader context, China’s central bank maintained its one-year policy rate, having recently implemented record cuts in funding costs a month prior. This cautious approach suggests that authorities are pacing their monetary stimulus to support economic recovery. However, a senior International Monetary Fund official highlighted that these fiscal measures are inadequate to combat deflationary pressures. Krishna Srinivasan, the IMF’s Asia-Pacific department chief, emphasized the need for the central government to increase spending to address the property crisis and alleviate price pressures.
In positive news for Taiwan Semiconductor Manufacturing Co., the company has reported early production yields at its Arizona plant that surpass those of similar facilities in Taiwan.
Current money market forecasts suggest a strong likelihood of a quarter-point rate cut by the Federal Reserve next month, with an expected 43 basis points of cuts by the end of the year, according to Bloomberg data.
Sam Stovall from CFRA noted, “Investors perceive the resilience of the economy and employment as forcing the Fed to be ‘slower to lower’ rates,” predicting two 25 basis-point cuts in 2024.
In the commodities market, oil prices advanced following a drop on Thursday, as oversupply concerns overshadowed potential risks stemming from Israel’s threats of retaliation against Iran. Meanwhile, gold prices fell on Friday but remained close to their record high levels.
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