Stocks set to end turbulent month higher as US data sets stage for cut

Global stocks edged higher in choppy trading and were on track for a fourth consecutive month of gains despite a bout of heavy selling in early August, buoyed by US economic data that has helped the dollar snap a weeks-long losing streak. The US personal consumption expenditures (PCE) price index - which is the Federal Reserve’s preferred inflation measure - rose 0.2% in July, according to Commerce Department data released. Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.5% last month, the report showed.

The data sets the stage for the Fed to likely begin easing monetary policy from September. The Dow Jones Industrial Average was down 0.14% at 41,276.72, the S&P 500 gained 0.20% to 5,603.12 and the Nasdaq Composite was up 0.34% at 17,576.13.

Europe’s Stoxx index closed up 0.09% after touching a record intraday high while Britain’s FTSE 100 eased 0.04%. MSCI’s world share index ticked 0.16% higher, heading for a 1.78% monthly gain.

The stunning recovery from an early August sell-off reminiscent of October 1987’s “Black Monday” came as traders priced a so-called Goldilocks scenario, in which the U.S. economy keeps growing but not so much as to prevent interest rate cuts.

Money markets are confidently pricing the Fed’s first 25 basis point cut of this cycle at its September meeting, with a 33% chance of a jumbo 50 bp reduction.

The US economy grew faster than initially thought in the second quarter of this year because of strong consumer spending, and corporate profits, a report on Thursday showed.

“The last few days we’ve started out a little stronger and then drifted during the day and in many cases closed either break even or slightly positive or slightly negative,” said Tom Plumb, chief executive and portfolio manager at Plumb Funds.

“I think that is a sign of a cycle where you start to see people transition to a different environment and it’s not positive for the past leaders,” he added, referring to the so-called “Magnificent 7” tech stocks that were at the forefront of this year’s stock market rally.

Government bonds rallied in early August after a weaker-than-expected US jobs report and a surprise Bank of Japan rate hike wreaked chaos in currency carry trades and drove heavy selling of risky assets.

The yield on benchmark U.S. 10-year notes, which moves inversely to prices, rose 4.9 basis points on Friday to 3.909%. The 2-year note yield, which typically moves in step with interest rate expectations, rose 3.2 basis points to 3.9248%.

“As we’re starting to lay out what our expectations are for an environment with lower interest rates, at least lower short term rates... we’re already starting to see a change in the shape of the yield curve, which impacts the bond market but also the stock market,” Plumb added.

The dollar steadied near a one-week high versus a basket of other major currencies, on track to snap a five-week losing streak although still heading for around a 2.5% monthly loss.

Against the yen, the dollar stood at 146.09, set to lose more than 2% for the month, as pressure eased on the Japanese currency on the prospect of narrowing interest rate differentials.

Core inflation in Japan’s capital Tokyo accelerated for a fourth straight month in August, data showed on Friday, with the 2.4% price increase signalling further BoJ rate hikes ahead.

The euro was flat at $1.105, having declined on Thursday after softer-than-expected German inflation data increased bets on further European Central Bank rate cuts.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.48% and ended the month 2% higher. Japan’s Nikkei, following its early August collapse, was down 1.16% for the month after rising 0.74% on Friday.

Oil fell about 2% on Friday as investors weighed expectations of a rise in Opec+ supply starting in October, alongside dwindling hopes of a hefty US interest rate cut next month, following data showing strong consumer spending. Brent crude futures for October delivery, which expire on Friday, fell $1.16, or 1.5%, at $78.78 a barrel by 1:37 p.m. EDT (1737 GMT), on track for a decline of 0.3% for the week and 2.4% for the month. US West Texas Intermediate crude futures slipped $2.20, or 2.9%, to $73.71, set for a drop of 1.5% in the week and 3.4% decline in August.

The Organization of the Petroleum Exporting Countries and allies, known as OPEC+, is set to proceed with a planned oil output hike from October, as the Libyan outages and pledged cuts by some members to compensate for overproduction counter the impact of sluggish demand, six sources from the producer group told Reuters.

“Opec+ talking about going ahead with tapering off production cuts was the headline that really sunk us today,” said Phil Flynn, analyst with Price Futures Group. Meanwhile, investors responded to new data that showed US consumer spending increased solidly in July, suggesting the economy remained on firmer ground early in the third quarter and arguing against a half-percentage-point interest rate cut from the Federal Reserve next month. Lower rates can boost economic growth and demand for oil.

Agencies