GLOBAL MARKETS-Bonds rise on weak data; gold's worst week since June

Fri Sep 13, 2013 10:53am EDT

* U.S. Treasury prices rise after weak retail sales, consumer sentiment figures

* Gold at five-week low as Fed liquidity curbs weigh

* Nikkei report on Summers as next Fed chief briefly lifts dollar

* World stocks slip for second day, miners knocked by gold

By David Gaffen and Richard Hubbard

NEW YORK/LONDON, Sept 13 (Reuters) - The dollar and U.S. Treasury yields fell on Friday after weak U.S. data on retail sales and consumer sentiment, while gold was headed for its worst week in two months on reduced concern about a potential strike on Syria.

Major world equity markets were little changed, meanwhile, with investors already looking ahead to next week's key U.S. Federal Reserve meeting. Despite Friday's worse-than-expected figures, it is expected the Fed will begin to reduce its monthly purchases of bonds that have restrained interest rates and boosted risk assets.

Retail sales rose slightly in August, and wholesale prices remained subdued, with the Labor Department's core producer price index rising just 1.1 percent year-over-year, the slowest rate of increase since June 2010. It underscores the lack of inflation pressures in the economy, though economists believe it still will not deter the Fed from cutting its bond purchases.

"These were the two big numbers, the PPI and retail sales and I don't think either of them change the outlook, which our base case is the Fed goes in and begins the (tapering) process here on the Sept. 17-18 meeting," said Darrell Cronk, regional chief investment officer at Wells Fargo Private Bank in New York.

Bond prices had sold off overnight and the dollar staged a rally after a Japanese report that former Treasury Secretary Lawrence Summers would soon be named to head the Fed.

While traders had doubts about the source of the report in Japan's Nikkei business daily, analysts said its impact highlighted the sensitivity of investors to the possibility of Summers taking over at the Fed. Markets believe he might tighten monetary policy more quickly than the other main candidate, Fed Vice Chair Janet Yellen.

Asked about the story, a White House spokeswoman said Obama had not made his decision about the Fed job.

The Dow Jones industrial average rose 34.03 points or 0.22 percent, to 15,334.67, the S&P 500 lost 0.28 points or 0.02 percent, to 1,683.14 and the Nasdaq Composite dropped 12.671 points or 0.34 percent, to 3,703.297.

Gold was down 5.4 percent for the week, the worst since June, after heavy selling linked to expectations of the Fed rollback and an easing of tensions over Syria. Gold was quoted at $1,317.51 an ounce, down 0.2 percent, and has now lost around 21 percent this year after 12 consecutive annual gains.

"This is almost certainly the pricing in of the expectations of QE tapering," Mitsubishi analyst Jonathan Butler said.

The dollar was up 0.2 percent against a basket of major currencies while 10-year U.S. Treasury yields fell to 2.89 percent, down from Thursday's close of 2.905 percent.

Investors generally expect the Fed to announce a tapering of its monthly $85 billion of bond purchases next week in response to signs of growing strength in the U.S. economy, but the pace of future cutbacks is less clear.

"In the coming months given that the new Fed chairman starts in January, the Summers effect, if it is announced, could be as dominant (as the Fed's tapering decision)," said Mike Gallagher, managing director of IDEAglobal.

Gallagher said the combination of a Fed tapering decision next week and the prospect of Summers becoming chairman could set U.S. Treasury 10-year yields on a course towards 3.5 percent by year's end. Such a move would hit other markets hard, as many expect the benchmark 10-year to remain around 3 percent.

A successful Summers nomination is far from certain, and any appointment must be approved by the U.S. Senate.

SHARES SLIP

European shares were little changed though mining stocks were hit as metal prices suffered from the expected Fed stimulus curbs. Data showing a slower rate of decline in euro zone employment in the second quarter had little impact.

MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.5 percent, pulling further away from a three-month high and on track for a second day of losses after a 10-day winning streak - its longest run in six years.

The Asian gauge is still up 2.2 percent this week.

In Tokyo, the Nikkei share average edged up 0.1 percent on reports the government is considering lowering the corporate tax rate next year as part of efforts to soften the impact of a planned consumption tax hike.

Brent crude oil slipped to around $112.25 a barrel, on course for its biggest weekly loss in three months as the United States and Russia worked on a plan for Syria to surrender its chemical weapons.

"Since concerns on a possible U.S.-led military strike against Syria have eased, market participants are just waiting for the outcome of next week's Fed meeting," said Masaki Suematsu, Energy team manager at Newedge.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.