Stocks weaken, dollar extends rally on Fed’s policy outlook

BLOOMBERG

European stocks headed for their longest run of losses in more than five years after weak German economic data, while the dollar strengthened as investors increased bets for further Federal Reserve policy tightening. The Stoxx 600 gauge retreated for a seventh day as German industrial output declined again in July, further holding back Europe’s biggest economy. The Bloomberg dollar index is on track for an eighth consecutive week of gains, which would be the longest ever run of increases in data going back to 2005.
“Germany’s industrial production continues its nosedive and even diehard pessimists are nervous,” wrote Carsten Brzeski, global head of macro for ING Research. “The full batch of hard macro data for July suggests that the risk of recession is high again.”
Downward pressure on US equity futures intensified as more details emerged about China’s plans to ban iPhones from certain government departments and state-backed agencies and companies in a blow to Apple Inc.
Treasury yields drifted higher across most of the curve, extending increases that pushed two-year yields above 5%. The moves followed data from the Institute for Supply Management’s US services index, which in August reached 54.4, its highest monthly reading since February and one that topped all estimates in a Bloomberg survey of economists. A reading above 50 denotes growth.
Following a string of stronger-than-expected reports on everything from consumer spending to residential investment, economists have been boosting their forecasts for US gross domestic product. That marks a sharp turnaround from three months ago — the last time policymakers updated their own numbers — when the consensus view was that the economy would stall in the current quarter.
And it may be enough to prompt Fed officials to scale back their estimates for rate cuts in 2024. Traders in recent months have trimmed bets on the degree of Fed easing they see next year — to about 100 basis points from well over 150 basis points early in 2023.
“The ISM Services Sector report underscores the resilience of the largest portion of the economy,” said Quincy Krosby, chief global strategist at LPL Financial, who pointed to higher prices shown within the data. “This is certainly not good news for a data-dependent Fed.”

Patience Needed
The risk-off sentiment spilled into Asia, where all major markets declined. Chinese stocks were among the worst performers, weighed down by property developers, which partly retraced a rally in the prior session. Meantime, former Fed Bank of St Louis chief James Bullard noted officials should continue to pencil in one additional hike this year when they update their projections later this month.
The risk-off sentiment spilled into Asia, where all major markets declined. Chinese stocks were among the worst performers, weighed down by property developers, which partly retraced a rally in the prior session.  The yuan weakened as the People’s Bank of China set the so-called fixing at a stronger-than-expected level for a 54th straight day on Thursday. That’s the longest stretch since Bloomberg started the daily survey in 2018. Gold edged higher after dropping the previous day.