By Min Zeng
Investors pushed government-bond prices and the dollar to new
highs on Friday, ahead of a week that will test assumptions about
economic growth on both sides of the Atlantic.
More investors are betting that the European Central Bank on
Thursday will boost stimulus measures in a bid to head off a
further slowdown in the eurozone economy.
The next day, a report on the U.S. jobs market is expected to
show continued strength in the U.S. economy, paving the way for the
Federal Reserve to lift interest rates that have been pinned near
zero since the financial crisis.
In addition, Fed Chairwoman Janet Yellen is scheduled to speak
Wednesday at the Economic Club of Washington and testify before the
Joint Economic Committee of the U.S. Congress on Thursday.
A widening divergence between the ECB's and the Fed's monetary
policies is likely to further stoke a rally in the dollar and
revive concerns, such as subdued inflation, that accompany a
stronger greenback. In the bond market, anticipation of more easing
measures from the ECB is helping to offset the selling pressure
spurred by expectations for Fed tightening.
Rising rates tend to be negative for bond prices because they
shrink the value of existing debt.
"Next week is the most important week so far this year for
global markets," said Andrew Brenner, head of international fixed
income at National Alliance Capital Markets in New York. "You have
the two key central banks and the key U.S. jobs data in the same
week, which is going to generate a lot of volatility."
On Friday, the WSJ Dollar Index, which tracks the dollar's value
against 16 currencies, hit a 13-year high. The index in part was
powered by the dollar's recent gains against the euro. One euro
bought $1.0594 on Friday, down 12% this year.
But if next week's events leave investors disappointed on any
count, financial markets could be in for whiplash, market watchers
say.
"There are large risks next week," said Charles St-Arnaud,
economist and currencies strategist at Nomura Securities. "We could
be at the point where too many people are expecting a lot from the
ECB." Combine that with a disappointing jobs report, and the dollar
could head lower, Mr. St-Arnaud said.
Trading volumes across financial markets were low on Friday. The
Dow Jones Industrial Average fell 14.9 points, or less than 0.1%,
to 17798.49 in an abbreviated session.
The yield on the two-year German government bond fell to a
record low of negative 0.412%, and the 10-year German yield
declined to a one-month low of 0.460%. Bond yields fall when prices
rise.
Declining yields in Europe drove buyers into U.S. bonds, sending
the yield on the benchmark 10-year Treasury note to 2.222% in
Friday's shortened trading session from 2.232% on Wednesday. The
10-year yield is at a three-week low.
"Low global yields continue to place downward pressure on U.S.
yields, which are high relative to much of the developed world,"
said Tony Crescenzi, senior market strategist at Pacific Investment
Management Co. in Newport Beach, Calif., which had $1.47 trillion
in assets under management at the end of September.
"It is highly probable that the ECB will announce new stimulus
measures at its forthcoming meeting," Mr. Crescenzi added.
At their policy meetings in October, ECB officials signaled that
the door is open for more stimulus, while Fed officials signaled a
rate increase at the Dec. 15-16 meeting is on the table.
Analysts say the ECB next week could cut some deposit rates
deeper below zero and expand its bond-buying program that started
in March.
Economists expect Friday's nonfarm-payrolls report to show the
U.S. economy added 205,000 new jobs in November, in line with this
year's monthly average. Any pickup in wage growth would be
reassuring to Fed officials, who have hesitated in raising rates
this year.
Christopher Sullivan, who oversees $2.3 billion as chief
investment officer at the United Nations Federal Credit Union in
New York, said the Fed could raise rates in December even if the
jobs report proves disappointing.
"Barring any substantial negative shock, the Fed has to deliver
at this point or they risk their credibility," said Mr.
Sullivan.
The prospect of higher interest rates in the U.S. and lower
interest rates in the eurozone has spurred investors to pile into
bets on the dollar.
A short-term benchmark interest rate of 0.25% in the U.S., after
a potential rate increase, would exceed 0.05% in the eurozone and
0.1% in Japan, drawing more investors to the U.S. and pushing up
the greenback's value in the process.
While a stronger dollar suggests an upbeat growth outlook in the
U.S., it also hurts U.S. exports and the earnings outlook of
American firms in overseas markets. A rising buck also makes it
difficult for the Fed to push up inflation to its 2% target in the
medium term.
Bullish bets on the dollar against a number of its rivals,
including the euro and the yen, totaled $41.7 billion in the week
ended Nov. 17, more than tripling in the past month, according to
Scotiabank analysis of data from the U.S. Commodity Futures Trading
Commission.
Some investors are already booking profits. Mark Dowding, senior
fixed-income manager at BlueBay Asset Management, which oversees
$60 billion under management, said he cashed out of his bearish
bets on the euro against the dollar during the past week.
"The euro trade is very crowded,'" said Mr. Dowding.
James Ramage contributed to this article.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
November 27, 2015 17:45 ET (22:45 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.