Bond yields creep higher as markets wait for Fed signals

Shares were treading water on Wednesday while rising Treasury yields kept the dollar steady, as investors waited to hear whether the world’s most powerful central banker would confirm or confound expectations for a U.S. rate cut this month.

MSCI’s broadest index of world stocks was little changed after three days of losses. Europe’s subdued start reflected pre-event caution rather than how the day would pan out.

London’s FTSE .FTSE edged up 0.2% and Paris .FCHI also rose after better-than-expected French industrial data. Germany’s Dax .GDAXI lagged with a loss of 0.1% and E-Mini futures for the S&P 500 ESc1 were a shade lower.

Japan’s Nikkei .N225 had also finished lower and Chinese blue chips .CSI300 barely budged as data showed inflation remained subdued.

A worrying lack of inflation globally is one reason investors are counting on Federal Reserve Chair Jerome Powell to sound suitably dovish when he testifies to Congress on Wednesday.

Futures still fully price in a 25-basis-point cut at the Fed’s July 30-31 meeting, but they no longer suggest a half-point move. They had implied a 25% probability of an aggressive cut before an upbeat U.S. jobs report on Friday.

“I think the market seems to be veering toward a less dovish message from Powell than was the prevalent a couple of weeks ago,” said Bank of New York Mellon senior strategist Neil Mellor.

He still thought the Fed would cut by 25 basis points this month — the first U.S. cut since the financial crisis — but whether it keeps going was much less clear.

“The real interest is what happens thereafter,” Mellor said. “If we are talking about a stronger dollar, then we have to bear in mind comments from President Donald Trump last week, who said, ‘Well, perhaps we should start manipulating the dollar.’”

Overnight, Atlanta Fed President Raphael Bostic said the central bank was debating the risks and benefits of letting the U.S. economy run “a little hotter.”

Meanwhile, U.S. and Chinese trade officials held “constructive” talks on trade by phone on Tuesday, White House economic adviser Larry Kudlow said.

Wall Street had been duly circumspect, with the Dow .DJI ending down 0.08%, while the S&P 500 .SPX added 0.12% and the Nasdaq .IXIC 0.54%.

A LITTLE MORE YIELD

The cooling in U.S. rate fever has seen bonds give back just a little of their rally. Yields on two-year Treasuries rose to 1.917% from their recent low of 1.696% and Europe’s benchmark yields up around five basis points.

That in turn has helped the dollar index against a basket of currencies rebound to 97.500 from a June low of 95.843.

The dollar also gained to 108.92 yen JPY=, though the brighter French data helped the euro gain to $1.1225 EUR=, still down from its $1.1412 level of just a couple of weeks ago.

The Mexican peso MXN= began to recover after sliding on Tuesday when Finance Minister Carlos Urzua suddenly resigned, citing “extremism” in economic policy.

The Canadian dollar CAD= was on the defensive before a Bank of Canada meeting, in case policymakers tried to slow the currency’s recent rally.

Gold fell 0.3% to $1,393.68 per ounce as the dollar gained.

Oil prices rose on Middle East tensions and news that U.S. stockpiles fell for a fourth week in a row. Brent crude futures gained 64 cents to $64.80. U.S. crude was up 82 cents to $58.65 a barrel.