Stocks edge up, yields dip on muted Fed hike expectations

A gauge of global equity markets reached its highest level in over a year on Wednesday and US Treasury yields declined for a second straight session as expectations for a interest rate hike by the Federal Reserve remained muted.

According to the Fed’s Beige Book report of anecdotal information collected from business contacts, the US economy expanded modestly in July and August. But there was little sign that wage pressures were being felt beyond highly-skilled jobs, which the Fed is looking for to push inflation higher.

But comments from Richmond Fed President Jeffrey Lacker and Kansas City Federal Reserve President Esther George had on Wednesday hinted that the possibility of a rate increase in September remained on the table.

The probability for a September rate hike inched up to 18 per cent after the comments, from 15 per cent in the prior session, according to CME’s FedWatch tool, while expectations for a December increase nudged back above 50 per cent.

A weaker-than-expected August employment report on Friday and Tuesday’s soft services sector data have crimped expectations the Fed will boost rates when it meets next week and for the rest of the year.

“Follow-through from last week’s OK-but-not-tremendous employment number is sending the lower-for-longer interest rate message out there to people ,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

The Dow Jones industrial average fell 12.4 points, or 0.07 per cent, to 18,525.72, the S&P 500 lost 0.34 points, or 0.02 per cent, to 2,186.14 and the Nasdaq Composite added 8.02 points, or 0.15 per cent, to 5,283.93.

US stocks were led lower by the consumer staples sector , off 0.9 per cent. General Mills shares lost 4.3 per cent to $67.85 after the company said its first-quarter organic net sales will be below its full-year guidance range.

European shares reversed early losses, with the FTSEurofirst 300 closing up 0.3 per cent. MSCI's all-country world index edged up 0.09 per cent after touching an intraday peak of 424.71, its highest level since August 2015.

Oil prices were positive in a volatile session, as the market focused on the possibility that the world’s top crude producers would agree on an output freeze. Brent futures settled up 1.5 per cent at $47.98 and US crude ended up 1.5 per cent at $45.50 a barrel.

The subdued expectations for a rate hike sent US Treasury yields lower, with benchmark 10-year Treasury notes up 2/32 in price to yield 1.5374 per cent, from 1.543 per cent on Tuesday. Yields fell as low as 1.519 per cent, a three-week trough.

The dollar was last down 0.2 per cent at 101.75 yen, having fallen as low as 101.18, its weakest since August 26, after a report from the Sankei newspaper that Bank of Japan policymakers are divided ahead of the central bank’s next meeting.

But the dollar index, which measures the greenback against a basket of major currencies, edged up 0.18 per cent to 94.994 after a drop of more than 1 per cent on Tuesday.