Global shares firm amid hope central bank will pause rate hikes

London — Stocks firmed on Thursday as investors bet that central banks meeting next week will signal a slowdown or even a pause in interest rate hikes for later in the year to make recession less likely and ease pressure on corporate earnings.

Oil prices were steady after US crude stocks rose less than expected, while gold hit a nine-month peak.

The dollar wobbled near an eight-month low against its peers as a gloomy fourth-quarter earnings season continued ahead of US Federal Reserve, European Central Bank (ECB) and Bank of England (BoE) meetings next week, with all three expected to continue hiking interest rates.

Ahead of that, the Commerce Department is due to release advance estimates of US fourth-quarter GDP later on Thursday, with expectations that strong growth continued in the final months of 2022.

Stocks rose on Wednesday after the Bank of Canada became the first major central bank to say it was ready to pause or end its tightening cycle, with markets now hoping that other central banks will hint next week at a similar mindset, analysts said.

“Ultimately a pause is a hell of a lot different from what markets are pricing in, which is a cut by the end of this year,” said Mike Hewson, chief markets strategist at CMC Markets. “This narrative is more wishful thinking than anything else.”

The MSCI all country stock index was up 0.2% at 644.68 points, just short of Monday’s high for the year, with the benchmark now 6% up for 2023.

In Europe, the Stoxx index of 600 leading companies was up 0.5%, leaving it up about 6% for the year, erasing about half of last year’s losses.

“What the market is really looking for is what the Fed will say next week in terms of how many hikes they have in mind,” Laureline Renaud-Chatelain, fixed income strategist at Pictet Wealth Management, who expects a 25-basis point (bp) hike at next week’s Fed meeting.

Markets are expecting rate cuts later in 2023 and while there is momentum in stocks, the unfolding fourth-quarter results season is disappointing in parts, leading to corrections in earnings expectations, Renaud-Chatelain said.

“We believe the Fed will make a special effort to avoid suggesting that the end of the tightening process is in sight,” said Kevin Cummins, chief economist at NatWest Markets.

US stock index futures were slightly firmer.

Seven-month high

Asian equities rose to a fresh seven-month high, with Hong Kong shares playing catch-up to other markets’ gains as trade resumed after its three-day Lunar New Year holiday.

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.1% and was set for its fifth consecutive day of gains.

The index has gained 10% so far in January, buoyed by expectations of a strong economic rebound in China and by he hope that most major central banks are nearing an end to hefty rate rises.

The spotlight will be on the US GDP data due later on Thursday. The report could mark the last quarter of solid growth before the lagged effects of the Fed’s jumbo rate hikes kick in.

“The US GDP release today will be of key interest to gauge whether the market expectations shifting in favour of a soft landing rather than a recession can continue to hold,” Saxo strategists said in a note to clients.

Hong Kong’s Hang Seng index surged 2.4% in its first day of trade in the year of the rabbit, while Japan’s Nikkei fell 0.12%.

In the currency market, the dollar index, which measures the US currency against six major rivals, was at 101.70, not far off the eight-month low of 101.51 it touched last week.

The Japanese yen strengthened 0.15% to ¥129.76 per dollar, while sterling was last trading at $1.2393, down 0.06% on the day.

The yield on 10-year treasury notes eased to 3.454%, while the yield on the 30-year treasury bond was lower at 3.6092%.

A closely watched part of the US treasury yield curve measuring the gap between yields on two- and 10-year treasury notes, seen as an indicator of economic expectations, was at -67.70bps. The inversion of this curve has predicted eight of the past nine recessions, analysts have said.

Oil prices were steady after US crude stocks rose less than expected. US West Texas Intermediate (WTI) crude was slightly firmer at $80.2 a barrel, while Brent was at $86.05, down 0.08% on the day.

Gold prices touched a nine-month high, with spot gold at $1,941/oz, after hitting $1,949.09 earlier in the day.