Global equities rise to one-month peaks on easing inflation

London — World stocks scaled one-month peaks on Friday thanks to signs inflation is easing, while the yen jumped to seven-month peaks and Japanese bond yields breached a central bank target as investors challenged its commitment to loosen monetary policy.

European shares opened higher and the broad Stoxx 600 index touched its highest since April, while Asian-Pacific shares outside Japan hit a new seven-month high and was headed for a third consecutive week of gains.

US stock futures pointed to a weaker open for Wall Street but sentiment generally was upbeat a day after data showed US price pressures easing further. It was Japan that grabbed the market spotlight as the yen shot up and benchmark 10-year government bond yields breached the Bank of Japan’s (BoJ) 0.5% ceiling on speculation that its yield curve control policy could be revised, or even abandoned, as early as next week’s policy meeting.

A wave of emergency BoJ buying later reined the yield back in, but markets remained jumpy.

The yen strengthened to ¥128.11 per dollar — its highest since late May. It was last up 0.8% and has rallied 6% in little more than three weeks since the BoJ stunned markets by widening the band around its 10-year government bond yield target.

A newspaper report flagging the possibility of more flexibility has redoubled bets on a coming shift out of ultra-easy policy that seeks to pin yields near zero. The BoJ said it will conduct additional outright bond purchases on Monday, a move that should keep yields in check.

“I think it’s too early for the BoJ to give up,” said Nomura chief Japan macro strategist Naka Matsuzawa. “It still has ammunition to defend the 0.5% yield cap.”

The BoJ will likely raise its inflation forecasts next week and debate whether further steps are needed, sources familiar with the bank’s thinking told Reuters.

Inflation optimism

Beyond Japan, market sentiment was dominated by overnight US December inflation data that landed more or less on consensus expectations. The annual pace of headline consumer price rises slowed to 6.5% in December from 7.1% in November.

Investors responded by downshifting expectations for US interest rates. A Federal Reserve hike of 25 basis points (bps) rather than 50 in February is now expected, with futures markets pricing in rate cuts later in 2023.

Against this backdrop, MSCI’s World Stock Index rallied to a one-month high and was set for its biggest weekly jump in two months. “These latest US [inflation] numbers support the view that the Fed is moving towards 25bps rate hikes and that is offering consolation to the equity markets,” said Nordea chief analyst Jan von Gerich.

The dollar slipped broadly and US treasuries rallied.

The yield on the 10-year US treasury yield fell to 3.418%, its lowest since December 7.

The euro rallied to a nine-month high of $1.0868 and the risk-sensitive Australian dollar rose to a roughly five-month high at $0.6994.

News that Britain’s economy unexpectedly eked out some modest growth in November supported sterling, which rallied 0.25% against the dollar.

Oil extended gains overnight — helped, too, by optimism about China’s reopening — and Brent crude futures were last up around 0.4% $84.33.

Elsewhere, South Korea’s central bank raised its policy interest rate by 25bps on Friday, as expected, and economists now think it might have reached the end of its hiking cycle.

Reuters