MSCI’s global equities gauge fell on Thursday and bond yields dropped with the U.S. dollar as investors analysed weaker than expected U.S. growth data and Federal Reserve comments for clues on the outlook for interest rates and the economy.
The U.S. economy grew more slowly than expected in the first quarter after downward revisions to consumer spending, according to a Commerce Department report which showed gross domestic product growing at an annualized rate of 1.3% versus advance estimates of 1.6%.
The U.S. dollar index lost ground following the data after rising to a two-week high the previous day, while Thursday’s decline in U.S. Treasury yields followed two straight days of gains driven by weak government debt auctions.
“The initial reaction was that the Fed is more likely to cut rates now than before because a cooling in the economy and consumption might mean slightly less inflation,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. But he sees the outlook for rates as only one factor.
“It’s possible you’ve got a little bit of a push and pull where there’s stock market investors looking for a rate cut, which could potentially put prices higher,” he said. “But there’s also fundamental investors looking at a slowing economy and corporate profits start to slow as more of a negative than a positive for the stock market.”
Earlier, Jamie Cox, managing partner for Harris Financial Group, said the “move down in yields reflects the reality that the economy is slowing” implied by the GDP data.
Also a weak financial outlook from Salesforce Inc (CRM.N), opens new tab late on Wednesday sent that stock down close to 20% on Thursday, prompting a broader sell-off in software that hurt the technology index (.SPLRCT), opens new tab, the S&P 500’s (.SPX), opens new tab biggest drag.
As a result, on Wall Street, the Dow Jones Industrial Average (.DJI), opens new tab fell 330.06 points, or 0.86%, to 38,111.48, while the S&P 500 (.SPX), opens new tab dropped 31.47 points, or 0.60%, to 5,235.48 and the Nasdaq Composite (.IXIC), opens new tab lost 183.50 points, or 1.08%, to end the session at 16,737.08.
MSCI’s gauge of stocks across the globe (.MIWD00000PUS), opens new tab fell 3.22 points, or 0.41%, to 780.94.
And while investors digested GDP data they also waited anxiously for the main data event of the week – Friday’s April report on U.S. core personal consumption expenditures (PCE) price index, which is the U.S. Fed’s preferred inflation gauge.
The Fed’s Bank of New York President John Williams said that while the timing of interest rate cuts is not clear, he does not foresee a need to raise them further.
Chicago Fed President Austan Goolsbee said Fed officials are “trying to wrap their head around” whether further improvement in inflation will require higher unemployment, with less help coming from improved supply chains and other forces that can lower price pressures on their own.
In Europe earlier, the STOXX 600 (.STOXX), opens new tab index closed up 0.6% after falling sharply on Wednesday when data showed German inflation rose slightly more than forecast in May. Investors are waiting for key euro zone inflation data due on Friday.
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In Treasuries, yields slid after the data which kept expectations on track for the Fed to start cutting interest rates this year. U.S. two-year to 30-year yields all posted their biggest daily drop in two weeks after hitting four-week peaks on Wednesday after the weaker-than-expected debt auctions.
The yield on benchmark U.S. 10-year notes fell 7.6 basis points to 4.548%, from 4.624% late on Wednesday.
The 30-year bond yield fell 6.3 basis points to 4.6814% from 4.744% and the 2-year note yield, which typically moves in step with interest rate expectations, fell 5.6 basis points to 4.929%, from 4.985%.
“The GDP second release was a little bit more encouraging on the (personal consumption expenditures) side: a small downward revision there that was not anticipated to have more weakness,” said Zachary Griffiths, senior investment grade strategist at CreditSights, in Charlotte, North Carolina.
In currencies, the dollar index , which measures the greenback against a basket of currencies including the yen and the euro, fell 0.34% at 104.77, with the euro up 0.26% at $1.0828. Against the Japanese yen , the dollar weakened 0.47% at 156.86.
In energy, oil prices dropped for the second day in a row after the U.S. government reported weak fuel demand and a surprise jump in gasoline and distillate fuel stockpiles.
U.S. crude settled down 1.67% at $77.91 a barrel and Brent futures settled down 2.08% at $81.86 per barrel.
Spot gold added 0.13% to $2,341.94 an ounce as the dollar and bond yields retreated.
