Prospect of steeper Fed cuts boosts stocks, drives record gold prices

By Pete Schroeder

(Reuters) -U.S. stocks advanced on Friday and gold continued to hit record highs as investors looked to whether the Federal Reserve might move more aggressively to cut rates at its policy meeting next week.

Futures tied to the Fed's policy rate now reflect about a 47% chance the Fed will cut its policy rate by half a percentage point, climbing from 28% odds on Tuesday following media reports suggesting it could be a close call between a half-point and a quarter-point rate cut.

The growing anticipation of steeper cuts helped boost stocks, gold and Treasury prices, and drive down the dollar.

All three major U.S. indexes closed higher. The Dow Jones Industrial Average was up 0.72%, the S&P 500 jumped 0.54% and the Nasdaq Composite surged 0.65%.

MSCI's gauge of stocks across the globe rose 0.61%.

Hopes for a bigger cut were further boosted when influential former New York Fed President Bill Dudley said at a forum in Singapore, "There's a strong case for 50."

But tepid inflation and other economic data earlier in the week suggest the Fed may be willing to start slow as it cuts rates for the first time since 2020.

"It's true that many rate-cutting cycles have indeed begun with a heftier chop, but typically against the backdrop of financial market stress - with the S&P 500 just 1% off its peak, and U.S. household net worth at a record high, it's tough to point to financial stress," wrote Douglas Porter, chief economist for BMO Capital Markets.

In Asia, stocks in mainland China and Japan both closed lower, with the Shanghai Composite index down 0.48% and the Nikkei down 0.68%, although it was still positive on the week.

DOLLAR, YIELDS DIP

Investors preparing for Fed rate cuts continued to drive down the dollar, which dropped as much as 1.0% to 140.36 yen, its weakest since Dec. 28. It was last down 0.68% at 140.83.

The dollar index, which measures the currency against the yen and five other major rivals, dropped to a one-week trough at 101.00. It last stood down 0.05% at 101.11.

Benchmark 10-year Treasuries rallied, pushing yields down 2.1 basis points to 3.65886%. Yields on two-year bonds, which closely track interest rate expectations, dropped 5.9 bps to 3.5803%.

Gold headed for its strongest weekly gain since mid-August, up 0.9% to $2,581.70 an ounce, driven by dollar weakness and the looming rate cuts.

Crude oil regained ground in late trading as U.S. production restarted following the passage of Hurricane Francine. U.S. crude was up 0.29% to $69.17 a barrel and Brent grew 0.13% to $72.06 per barrel.

(Reporting by Pete Schroeder; Additional reporting by Kevin Buckland in Tokyo; Editing by Shri Navaratnam, Kim Coghill, Timothy Heritage, Alex Richardson, Jonathan Oatis, Will Dunham and Leslie Adler)