Dollar slips, stocks gain amid still tight U.S. labor market

By Herbert Lash and Elizabeth Howcroft

NEW YORK/LONDON (Reuters) – The dollar eased while a gauge of global equities edged higher on Thursday as investors considered a still-tight U.S. labor market and Federal Reserve signals that interest rates will stay higher for longer.

European stocks rebounded from three down days, while stocks on Wall Street retreated but pared deeper losses to close a bit lower. Long-dated Treasury yields hovered under 16-year highs before a much-anticipated U.S. jobs report on Friday amid uncertainty about the impact of higher rates on the economy.

Oil prices extended Wednesday’s sharp losses as the demand outlook remained uncertain as the market faces monetary policy that San Francisco Fed President Mary Daly said on Thursday is “well into” restrictive territory.

Daly told the Economic Club of New York that as the labor market continues to cool and inflation heads back to the Fed’s 2% target, “we can hold interest rates steady and let the effects of policy continue to work.”

But markets have set a higher neutral rate than what the Fed believes it will be, said Mike Sanders, head of fixed income at Madison Investments in Madison, Wisconsin.

“They’re committed to a higher for longer stance and there’s uncertainty of where the neutral is,” he said.

Initial claims for state unemployment benefits increased 2,000 to a seasonally adjusted 207,000 for the week ended Sept. 30, the Labor Department said on Thursday. Economists polled by Reuters had forecast 210,000 claims for the latest week.

“It’s pretty evident that the jobs market and the consumer are doing OK. Claims are still very, very low,” Sanders said. If claims are up to mid-250,000 by year’s end, “that’s a fairly obvious sign that there’s a loosening of the labor market.”

Long-dated Treasury bonds were flat to a bit higher, while the benchmark 10-year note slipped lower after hitting 4.884% the previous session and shorter-dated notes fell.

“We continue to get pretty strong commentary from central banks, particularly from the U.S. Fed, that rates are going to stay higher for longer,” said Nate Thooft, chief investment officer of multi-asset solutions at Manulife Investment Management in Boston.

“There’s quite a bit of uncertainty and questions being asked on this topic,” Thooft added.

Financial markets see the chance of the Fed hiking rates in November at 22.2% and have priced in the U.S. central bank’s overnight lending rate staying above 5% through to June 2024, with the first big cut happening then. Earlier this week the target rate was seen above 5% through next September.

The two-year Treasury yield, which reflects interest rate expectations, fell 3 basis points to 5.020%, while the benchmark 10-year note yield was down 1.9 basis points at 4.717%.

The dollar index fell 0.403%, with the euro up 0.45% to $1.055. The yen strengthened 0.43% versus the dollar at 148.45, below the 150 mark seen as a possible threshold that can lead to intervention by the Bank of Japan.

Analysts speculated earlier this week that Japanese authorities may have intervened to support the currency, but Bank of Japan money market data showed on Wednesday that was unlikely.

Despite the dollar’s recent renewed strength, analysts expect weakness, a Reuters poll showed.

MSCI’s gauge of stocks across the globe gained 0.20%, while the pan-European STOXX 600 index rose 0.28%, with the travel and leisure index up 1.45% on the prospect of easing fuel costs boosting airline stocks.

On Wall Street, the major indexes eased off earlier lows. The Dow Jones Industrial Average fell 0.03%, the Nasdaq Composite shed 0.12% and the S&P 500 lost 0.13%. Consumer staples was the largest declining sector at 2.07%.

Asian shares rebounded from 11-month lows overnight, following Wednesday’s small gains on Wall Street. China’s mainland markets remain closed for holidays.

European government bond yields were mixed, with the benchmark 10-year German yield down 1 basis point at 2.875%. The German curve was its least inverted since March.

U.S. crude futures fell $1.91 to settle at $82.31 a barrel, while Brent settled down $1.74 to $84.07.

“Investors are worried that peak demand for fuel consumption is behind us,” said Dennis Kissler, senior vice president of trading at BOK Financial. “But the market is still going to be under-supplied to the end of the year. It’s searching for an equilibrium.”

Gold prices edged lower for a ninth straight session.

U.S. gold futures settled 0.2% lower at $1,831.80 per ounce.

(Reporting by Elizabeth Howcroft; Editing by Elaine Hardcastle, Sharon Singleton, Richard Chang, Andrew Heavens and Cynthia Osterman)