London — Gains in Europe and data from China helped equity markets shake off their New Year blues on Thursday as the latest signals from the US Federal Reserve nudged the dollar and global bond yields lower.
Middle East tension continued to support oil prices and energy stocks, but the somewhat mixed messages from the Fed’s December meeting minutes and flurry of European data and trading updates drove the wider moves.
The pan-European STOXX 600 was up 0.4%, having fallen to a three-week low in the previous session.
Energy was the top sector gainer, up 1.3%, followed by a 0.8% rise in healthcare. British retailer Next was the best individual performer as a strong Christmas trading update lifted its share price nearly 5%.
Then came the data deluge. There were lower PMI readings from most of the eurozone’s top economies, but that was largely expected. German and French inflation surveys showed prices moving up again after eurozone inflation rose back to 3% last month.
That was enough to reverse some of the early falls in the region’s bond yields and also stretched the euro’s lead for the day over the dollar to leave it buying just short of $1.10 again.
MUFG analyst Lee Hardman said that the PMI data was a touch stronger than expected and the Fed’s minutes released on Wednesday largely bolstered the view that its rates will start falling again this year.
“I don’t think the push back (on expectations of rate cuts) was a strong as some people were fearing. That has certainly contributed to the renewed weakness in the dollar,” said Hardman.
Bond yields, which move inversely to prices, initially nudged lower in Europe but were lifted by the PMI and inflation numbers.
HCOB’s Composite Purchasing Managers’ Index (PMI), a survey-based gauge of the eurozone’s economic health, was revised up for December to match November’s 47.6 after an earlier estimate of 47. But that was still below the 50 mark separating growth from contraction.
The German 10-year yield, benchmark for the eurozone, was last up three basis points (bps) at 2.042%, having hit a 1-year low of 1.896% last week. France’s yield edged up to 2.578%.
Benchmark US Treasury yields climbed back briefly above 4% on Wednesday, but were back at 3.94% in Europe.
Asian shares managed to eke out a modest gain overnight, having dipped early on after Wall Street closed lower on Wednesday. Japan’s Nikkei ended lower on its first trading day of the year.
Minutes of the Fed’s December 12-13 meeting released on Wednesday showed a mounting sense among policymakers that inflation is under control and raised concern about the risks of “overly restrictive” monetary policy on the economy.
They suggested “many members endorsed the ‘higher rates for longer’ narrative, while those that projected rate cuts in 2024 viewed cuts coming later in the year,” said Quincy Krosby, chief global strategist for LPL Financial.
Krosby said it underscored an “uncertain” path, suggesting expectations for a US rate cut as early as March may need to be adjusted.
Markets are now pricing in a 70% chance of the Fed cutting rates in March compared with 90% a week ago, according to the CME FedWatch tool.
Investors lowered their expectations for the year slightly, with futures pricing showing less than 150 bps of easing expected this year versus 160 bps last week.
Goldman Sachs analysts still expect the first rate cut in March and five in total this year, calling the comments in the minutes dovish.
“We think it is already clear that inflation is moving down sustainably … the comment implies that once this threshold is met, the policy rate should no longer be restrictive, not just that cuts should begin,” they said in a note to clients
The spotlight will now be on the US nonfarm payrolls report scheduled for Friday to provide further clues on the labour market, which has shown signs of cooling.
US job openings fell in November, for the third month running, by 62,000 to 8.79-million, the labour department said in its monthly Job Openings and Labor Turnover Survey, or JOLTS report, on Wednesday.
A private-sector survey showed on Thursday that China’s services activity expanded in December at the fastest pace in five months thanks to a solid rise in new business, in contrast to an official survey that showed a subindex of services activity shrank again at the end of 2023.
In the currency market, the dollar index was down 0.3% at 102.18, having touched a three-week high of 102.73 on Wednesday.
Against the yen, the dollar hovered at a two-week peak of 143.87 yen, having jumped nearly 1% on Wednesday.
Oil also rose more than 1% on Thursday, adding to gains fuelled by concern about Middle Eastern supply after disruptions at an oilfield in Libya and heightened tension over the Israel-Hamas war.
On Wednesday, local protests forced a production shutdown at Libya’s Sharara oilfield, which can produce up to 300,000 barrels a day. The field, one of Libya’s largest, has often been a target for local and broader political protests.
Brent crude was last at $79.17 a barrel. US West Texas Intermediate crude futures were up 1.3% at $73.63. Gold edged up to $2,043.09 an ounce after touching its lowest point since December 21 on Wednesday
“At the moment, the oil price is not a significant economic issue, but it will stay in focus,” said UBS chief economist Paul Donovan.