Japan's Yen jumps against US dollar, bond yields fall as Fed's Waller comments curb rate hike bets

Stock markets rallied while bond yields fell on Thursday as comments from Federal Reserve Governor Christopher Waller signalled a willingness to remain patient on raising interest rates.

The Japanese yen jumped by 2% against the US dollar as traders ramped up bets on a Bank of Japan interest rate hike.

Waller, in remarks for a Reuters NEXT Newsmaker event, said that, if upcoming data confirmed inflation pressures were cooling off, he was inclined to argue in favor of keeping interest rates steady at the US central bank's next policy meeting.

Expectations for a rate increase at the Fed's mid-September meeting came down after the comments, with the market now pricing in a roughly 50% chance for a hike, versus about 63% in the prior session, according to CME FedWatch.

Early this week, global bond yields jumped as inflation worries mounted with oil prices surging after the biggest flare-up since July in the US-Israeli war on Iran. On Thursday, US Vice President JD Vance told reporters the US does not plan to hold talks with Iran unless Tehran stops attacking commercial shipping in the Strait of Hormuz.

"Commentary from Fed Governor Waller (is) providing a broad lift for markets writ large," said Bill Northey, senior investment director at US Bank Wealth Management, Billings, Montana.

The yield on the benchmark US 10-year Treasury note fell 3.8 basis points, on track for its biggest fall since August 25, to 4.756%. On Wednesday, the yield on the note hit 4.818%, its highest since November 1, 2023. Earlier, 10-year German yields were down 2 bps at 3.353%.

The day's US economic data supported the view that the jobs market was slow but stable; yet, investors are eager to see Friday's US monthly jobs report for more clues. The August employment report is expected to show the US economy added 56,000 jobs last month, holding the unemployment rate steady at 4.1%.

Easing bond yields boosted stocks. The Dow Jones Industrial Average rose 624.16 points, or 1.18%, to 53,686.11, the S&P 500 rose 81.11 points, or 1.06%, to 7,747.71 and the Nasdaq Composite rose 366.23 points, or 1.40%, to 26,584.06.

MSCI's gauge of stocks across the globe gained 11.87 points, or 1.04%, to 1,154.74. European stocks also rose, breaking a three-session streak of losses. The pan-European STOXX 600 was up 0.5% at 649.1, recovering from one-month lows hit on Tuesday.

Among the day's decliners, however, was chipmaker Broadcom, whose shares dropped 2.7% following its weaker-than-expected fourth-quarter revenue forecast.

YEN JUMPS ON RATE HIKE BETS

A sharp, sudden rise in the yen against the dollar on Wednesday fueled speculation that Japanese officials had intervened to shore up the currency, but analysts pointed to BOJ data showing no official intervention behind the Wednesday move.

On Thursday, Japan's top currency diplomat, Atsushi Mimura, said he remained on alert over currency market developments, warning that he was not yet comfortable with recent moves in the yen.

Markets are now pricing in 75% odds of a 25-basis-point BOJ hike this month, with some traders speculating that an even larger increase is possible. An additional hike in October is also seen as a possibility, though not a likely one.

The Japanese yen was last up 2.08% at 155.47 per dollar. It is approaching the 155.21 level that was the yen high after a July intervention.

The U.S. dollar added to losses following Waller's comments. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.69% to 98.91, with the euro up 0.41% at $1.1634.

On Wednesday, New York Fed President John Williams said rising long-term bond yields reflected a solid economy rather than inflation fears, adding that he was still collecting information to drive his next monetary policy decision.

"You have a lot of crosscurrents in the bond market going on right now," said Bruce Zaro, managing director at Granite Wealth Management in Plymouth, Massachusetts.

"You have the (Fed) governors coming out and voicing their opinions in the absence of forward guidance by (Fed Chair Kevin) Warsh. And you have a lot of hedge fund managers coming out and saying, contrarily, that this is probably a buying opportunity in bonds in that the total amount of debt doesn't seem to be a problem."

In commodities, oil prices ended mixed, with Brent crude futures falling 11 cents, or 0.12%, to settle at $95.52 a barrel and US West Texas Intermediate crude futures rising 29 cents, or 0.32%, to settle at $91.30. Both contracts hit six-week highs earlier in the session.

Spot gold rose 1.99% to $4,473.40 an ounce.

 

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