By Pete Schroeder
(Reuters) – U.S. stocks advanced on Friday and gold continued to hit record highs as investors looked to whether the Federal Reserve might move more aggressively to cut rates at its policy meeting next week.
Anticipation of Steeper Rate Cuts
Futures tied to the Fed’s policy rate now reflect about a 47% chance the Fed will cut its policy rate by half a percentage point, climbing from 28% odds on Tuesday following media reports suggesting it could be a close call between a half-point and a quarter-point rate cut.
The growing anticipation of steeper cuts helped boost stocks, gold, and Treasury prices, and drive down the dollar.
All three major U.S. indexes closed higher. The Dow Jones Industrial Average was up 0.72%, the S&P 500 jumped 0.54%, and the Nasdaq surged 0.65%. MSCI’s gauge of stocks across the globe rose 0.61%.
Hopes for a bigger cut were further boosted when influential former New York Fed President Bill Dudley said at a forum in Singapore, “There’s a strong case for 50.”
However, tepid inflation and other economic data earlier in the week suggest the Fed may be willing to start slow as it cuts rates for the first time since 2020. Douglas Porter, chief economist for BMO Capital Markets, noted that financial stress indicators are not currently present.
Market Movement in Asia
In Asia, stocks in mainland China and Japan both closed lower, with the Shanghai Composite index down 0.48% and the Nikkei down 0.68%, although it was still positive on the week.
Impact on Currency and Yields
Investors preparing for Fed rate cuts continued to drive down the dollar, which dropped as much as 1.0% to 140.36 yen, its weakest since December 28. It was last down 0.68% at 140.83. The dollar index, which measures the currency against the yen and five other major rivals, dropped to a one-week trough at 101.00 and last stood down 0.05% at 101.11.
Benchmark 10-year Treasuries rallied, pushing yields down 2.1 basis points to 3.65886%. Yields on two-year bonds, which closely track interest rate expectations, dropped 5.9 bps to 3.5803%.
Commodities and Gold
Gold headed for its strongest weekly gain since mid-August, up 0.9% to $2,581.70 an ounce, driven by dollar weakness and the looming rate cuts. Crude oil also regained ground in late trading as U.S. production restarted following the passage of Hurricane Francine. Brent crude was up 0.29% to $69.17 a barrel and WTI crude grew 0.13% to $72.06 per barrel.
