Stocks jump, US yields fall as Fed rate cut bets increase

By Chuck Mikolajczak

NEW YORK (Reuters) -Global stocks advanced for a second straight session on Monday as rising expectations for a December rate cut from the U.S. Federal Reserve helped to soothe recent concerns about stretched valuations in the AI space while longer-dated U.S. Treasury yields dipped.

Stocks stumbled last week to their largest weekly percentage drop since early August on market pessimism over the chances of a cut to interest rates, the economic impact of the extended U.S. government shutdown and lingering concerns over high valuations for AI-related companies. 

But equities rallied at the end of the trading week after New York Fed President John Williams said interest rates can fall in the near term even as other policymakers insisted borrowing costs should remain steady for now. 

Williams' comments were echoed on Monday by Fed Governor Christopher Waller, who said that available data indicates that the U.S. job market remains weak enough to warrant another quarter-point cut to interest rates. 

"It's a market that probably got a bit oversold in the short term, and the level of pessimism was rising," said Brian Levitt, chief global market strategist for Invesco. 

"The economic data is just not robust, and the market is certainly not expecting a recession, but a weaker backdrop is supportive of a reduction in the fed funds rate."

U.S. markets will be closed on Thursday for the Thanksgiving holiday. 

Markets are pricing in an 85.1% chance of a cut of 25 basis points at the December meeting, according to CME's FedWatch Tool, up from 42.4% a week ago.

Expectations for a rate cut increased further during the session after San Francisco Federal Reserve Bank President Mary Daly told the Wall Street Journal she supports lowering interest rates at the central bank's meeting next month as she sees a deterioration in the job market.  

Goldman Sachs chief economist Jan Hatzius said in a note on Sunday that he expects another cut from the Fed in December, followed by two more moves in March and June of 2026 "that take the funds rate to 3-3.25%." 

On Wall Street, U.S. stocks closed higher, led by a surge of nearly 4% in the communication services sector as Google parent Alphabet jumped more than 6%.  

The Dow Jones Industrial Average rose 202.86 points, or 0.44%, to 46,448.27, the S&P 500 gained 102.09 points, or 1.55%, to 6,705.08 and the Nasdaq Composite shot up 598.92 points, or 2.69%, to 22,872.01. The gains for the Nasdaq marked its biggest daily percentage rise since May 12. 

European equities closed higher on interest rate expectations while investors were also encouraged by signs of progress toward a peace deal between Ukraine and Russia. 

MSCI's gauge of stocks across the globe rose 11.57 points or 1.19% and was on track for the biggest daily percentage gain since November 10. The pan-European STOXX 600 index, meanwhile, ended the session up 0.14% after gaining as much as 0.71%. 

U.S. retail sales and producer prices data will also be in focus this week as the release of government data resumes after the end of the extended government shutdown. In Britain, British finance minister Rachel Reeves' eagerly awaited budget is due on Wednesday.

The U.S. and Ukraine were continuing work on a plan to end the war in Ukraine after agreeing to modify an earlier proposal that was viewed by Kyiv and its European allies as too favourable to Moscow. That weighed on oil prices because a deal could release more Russian oil supply through an easing of sanctions.

U.S. Treasury yields were lower on the interest rate expectations. The yield on benchmark U.S. 10-year notes fell 2.7 basis points to 4.036%.

A $69 billion auction in two-year notes was solid, with above-average demand of 2.68 times the notes on sale. 

In currencies, the dollar index, which measures the dollar against a basket of currencies, shed 0.07% to 100.18, with the euro up 0.1% at $1.1522. Sterling strengthened 0.11% to $1.3106.

Markets were also watching for signs of possible Japanese intervention in the yen, which weakened 0.28% against the greenback to 156.82 per dollar. The Japanese currency is down 1.8% against the dollar this month. 

Takuji Aida, an adviser to Prime Minister Sanae Takaichi, said on Sunday that Japan can actively intervene in the currency market to mitigate the negative economic impact of a weak yen.

U.S. crude rose 1.34% to settle at $58.84 a barrel and Brent settled at $63.37 per barrel, up 1.29% on the day due to the rising rate cut expectations and mounting doubts about whether Russia will obtain a peace deal with Ukraine. 

(Reporting by Chuck Mikolajczak in New York; Additional reporting by Johann M Cherian, Pranav Kashyap and Shashwat Chauhan in Bengaluru, Caroline Valetkevitch in New York, Amanda Cooper in London and Rae Wee in SingaporeEditing by Nick Zieminski and Matthew Lewis)