By Lawrence Delevingne
(Reuters) - Stocks fell and the dollar gained on Thursday after Federal Reserve minutes signaled U.S. interest rate cuts were set to begin but U.S. business activity fell to a 4 month low.
On Wall Street, the Dow Jones Industrial Average fell 0.45%, to 40,707, the S&P 500 lost 0.63%, to 5,585 and the Nasdaq Composite lost 1.13%, to 17,716.
The Fed minutes, released Wednesday, said the "vast majority" of policymakers felt that, if data came in as expected, a September cut was likely to be appropriate - validating market expectations.
On Thursday, fresh data showed the number of Americans filing new applications for unemployment benefits rose in the latest week, but the level remained consistent with a gradual cooling of the labor market.
U.S. business activity also fell to a four-month low in August and firms continued to struggle to pass on higher prices to consumers, bolstering the likelihood that inflation will stay on a downward trend over the coming months.
Steve Englander, a markets strategist for Standard Chartered Bank, said the Fed minutes showed the bank was in sight of its inflation target and unemployment is rising, putting a 50 bps rate cut "on the table".
"If they are not announcing that they have won on inflation, they are saying they expect to win relatively soon," Englander wrote in an email on Thursday.
Global stocks after a phenomenal rebound from early-month lows plumbed after a bout of volatility, fell about 0.3%.
European shares gained 0.36%, helped by retail stocks, after a subdued trading session in Asia. They added to initial gains after data for the euro zone showed surprising strength in business activity this month.
Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.3%.
Oil prices rallied after falling for a fifth straight day as investors worried about the global demand outlook before a decline in U.S. fuel inventories provided a floor.
U.S. crude gained 1.86% to $73.27 a barrel and Brent rose to $77.44 per barrel, up 1.83% on the day. [O/R]
Euro zone bond yields were higher after survey data showed the bloc's services sector fared better than expected in August, although a separate measure of wage pressures eased.
DOLLAR REBOUND
The dollar rebounded from a 13-month low against the euro on Thursday before Federal Reserve Chair Jerome Powell is due to speak on Friday and as the greenback's recent weakness was seen as being overdone relative to peers. The dollar index, gained about 0.4%.
Lower U.S. rates would give central banks around the world room to move. On Thursday the Bank of Korea opened the door to a cut in October, while Bank Indonesia has lined up cuts in the fourth quarter.
Still, rates and currency markets see a U.S. easing cycle as having further to run than other countries.
Interest rate futures markets have fully priced in a 25-basis-point cut from the Fed next month, with a 1/3 chance of a 50-bp cut. They project around 220 bps of U.S. easing by the end of 2025, to a rate of 3.145%, against around 160 bps for Europe, a 2.06% rate.
On Thursday, The yield on benchmark U.S. 10-year notes rose 8 basis points to 3.856%, from 3.776% late on Wednesday. The 2-year note yield, which typically moves in step with interest rate expectations, rose 7.7 basis points to 3.9993%, from 3.922% late on Wednesday.
The euro, which has made strong gains this month, fell about 0.4%.
In Britain, the pound initially rose to a new 13-month high on the dollar and also strengthened against the euro after British business activity data showed steady growth momentum going into the second half of 2024. The pound was last little changed at $1.309. [GBP/]
Investors said the dollar was facing a downtrend.
"The unequivocal signal from the (Fed) minutes has been the catalyst for the latest leg down in the U.S. dollar," said National Australia Bank's head of currency strategy, Ray Attrill.
"It is likely that the break above $1.30 on cable looks sustainable," he said, using a nickname for the sterling/dollar pair. "And similarly for the euro ... we're talking about potentially a $1.10-$1.15 range in coming weeks."
Gold prices fell more than 1% on Thursday, pressured by a rebound in the dollar and higher Treasury yields.
(Reporting by Lawrence Delevingne in Boston, Tom Wilson in London and Tom Westbrook in Singapore; Editing by Tom Hogue, Christina Fincher, Chizu Nomiyama and David Evans)
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