US stocks rise on prospect of aggressive Fed rate cut

Traders are pricing-in shorter odds of a half-point interest rate cut by the Federal Reserve at its policy meeting

A news conference with Federal Reserve Chairman Jerome Powell is broadcast to the floor of the New York Stock Exchange. AP

US stocks advanced on Friday as investors began to price in shorter odds of a half-point interest rate cut by the Federal Reserve at its policy meeting next week, fuelling risk appetite across the world.

All three major US indexes closed higher. The Dow Jones Industrial Average was up 0.72 per cent, the S&P 500 jumped 0.54 per cent and the Nasdaq Composite surged 0.65 per cent.

The S&P 500 index is 1 per cent short of its July record high despite weeks of market swings.

Economically sensitive shares outperformed the group of tech megacaps that have led the bull market, with the Russell 2000 index of smaller firms climbing 2.5 per cent.

MSCI’s gauge of stocks across the world rose 0.61 per cent.

After fluctuating sharply throughout the week, Fed funds futures on Friday showed traders pricing an almost equal chance of a 25-basis point cut and a 50-basis point reduction, according to CME Fedwatch.

“More optimistic investors had been hoping for a larger cut and were, therefore, disappointed by the Consumer Price Index reading,” said Richard Hunter, head of markets at Interactive Investor.

“Even so, the Fed continues to walk a tightrope between the labour market and inflation, and is arguably now under less pressure to ease monetary policy aggressively, with several smaller reductions more likely over the next few calendar months depending on subsequent data.”

The Fed has held its benchmark rate steady since July 2023.

The growing anticipation of steeper cuts helped to boost gold and Treasury prices and drive down the dollar.

Tepid inflation and other economic data earlier in the week suggest the Fed may be willing to start slowly as it cuts rates for the first time since 2020.

In Asia, stocks in mainland China and Japan both closed lower, with the Shanghai Composite index down 0.48 per cent and the Nikkei down 0.68 per cent, although it was still positive on the week.

Investors preparing for Fed rate cuts continued to drive down the dollar, which dropped as much as 1 per cent to 140.36 yen, its weakest since December 28. It was last down 0.68 per cent at 140.83.

The dollar index, which measures the currency against the yen and five other major rivals, dropped to a one-week trough at 101.00. It last stood down 0.05 per cent at 101.11.

Aggressive rate cut bets have helped fuel a Treasury rally, with the 10-year yield down some 80 basis points since the start of July to around 3.65 per cent, near its lowest level since June 2023.

Yields on two-year bonds, which closely track interest rate expectations, dropped 5.9 basis points to 3.58 per cent.

Gold headed for its strongest weekly gain since mid-August, up 0.9 per cent to $2,581.70 an ounce, driven by dollar weakness and the looming rate cuts.

With reporting from Reuters and Bloomberg