Wall Street ends higher, gold hits record ahead of rate cuts

By Pete Schroeder

(Reuters) -Wall Street eked out gains and gold surged to a record high on Thursday as investors awaited a Federal Reserve interest rate cut next week.

Major U.S. stock indexes spent much of the day in mixed territory before closing higher, after a rate cut from the European Central Bank and slightly hotter-than-expected U.S. producer prices kept outlooks locked on a modest Fed rate cut at its policy meeting next week.

At closing, the Dow Jones Industrial Average was up 0.58%, the S&P 500 was up 0.75%, and the Nasdaq Composite was up 1% on the back of strong tech stock performance.

MSCI's gauge of stocks across the globe was up 1.08%.

Earlier on Thursday, the ECB announced its second rate cut in three months, citing slowing inflation and economic growth. The cut was widely expected, and the central bank did not provide much clarity in terms of its future steps.

The ECB's second quarter-point rate cut since June was widely expected, but how hard and fast the bank moves for the rest of the year still seems up in the air.

For investors, attention quickly shifted back to the Fed, which will announce its interest rate policy decision at the close of its two-day meeting next Wednesday. The Fed is widely expected to cut rates for the first time since 2020. Fresh economic data out Thursday morning appeared to further temper expectations the Fed could cut rates by 50 basis points next week and is likely to opt for a more modest 25 basis point reduction. Inflation data released on Wednesday had already dented expectations for a 50-basis-point cut.

"Here it is all but certain that the FOMC will vote to lower interest rates for the first time in this cycle, but there is still the question of by how much," Investec Economics wrote in a note. "We do not think that the economic backdrop warrants such a large move at this stage, and instead favour a 25bp reduction."

Data out of the U.S. the last two days showed inflation slightly higher than expectations, but still low. The core consumer price index rose 0.28% in August, compared with forecasts for a rise of 0.2%. U.S. producer prices increased more than expected in August, up 0.2% compared with economist expectations of 0.1%, although the trend still tracked with slowing inflation.

The dollar slid against other major currencies. The dollar index, which measures the greenback against a basket of currencies, was down 0.52% at 101.25, with the euro up 0.54% at $1.1071.

OIL, GOLD SURGE

Oil prices were up nearly 3%, extending a rebound as investors wondered how much U.S. output would be hindered by Hurricane Francine's impact on the Gulf of Mexico. Oil producers Thursday said they were curtailing output, although some export ports began to reopen.

U.S. crude ended up 2.72% to $69.14 a barrel and Brent rose 2.21%, to $72.17 per barrel.[O/R]

Gold prices jumped to record highs Thursday, as investors eyed the precious metal as a more attractive investment ahead of Fed rate cuts.

Spot gold added 1.85% to $2,558 an ounce. U.S. gold futures gained 1.79% to $2,557 an ounce.

"We are headed towards a lower interest rate environment so gold is becoming a lot more attractive. ... I think we could potentially have a lot more frequent cuts as opposed to a bigger magnitude," said Alex Ebkarian, chief operating officer at Allegiance Gold.

In bonds, 2-year Treasury yields were up 1.2 basis points to 3.6579%, while 10-year yields were at 3.683%, up 3 basis points.

(Additional reporting by Stella Qiu in Sydney; Editing by Alison Williams, David Evans, Leslie Adler and Chizu Nomiyama)