World equities buoyant on US inflation optimism

Milan — World stocks held onto modest gains on Thursday on cautious optimism that US data will confirm inflation is softening, while the yen rose after a report that Japan will review the side-effects this month of its ultra-easy policy.

A MSCI gauge of world stocks rose 0.2% to a four-week high by 8.31am GMT ahead of core US consumer price inflation, which is expected to have slowed to an annual 5.7% in December, from 6% a month earlier. Month-on-month headline inflation is seen at zero.

Bonds held gains, also mirroring hopes of a softer inflation print, and the dollar was near a seven-month low against a basket of currencies. Europe’s Stoxx 600 equity benchmark index rose 0.4% to its highest since April 2022.

The US data due at 1.30pm GMT is set to have a big impact on markets by shaping expectations of the speed of interest rate hikes in the world’s biggest economy. Markets have priced better-than-even odds that the Federal Reserve raises rates by 25 basis points, rather than 50, at its meeting in February.

“Both the worst and best days for the S&P 500 in 2022 came on days of a CPI release. As such, it’s inevitable that today’s report has the ability to shape the next month,” wrote Deutsche Bank strategist Jim Reid.

“The latest releases have seen two downside surprises on CPI in a row for the first time since the pandemic, which has led to growing hopes that the Fed might achieve a soft landing after all,” he added.

The MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.1% after climbing to a seven-month high, while Japan’s Nikkei was steady.

S&P 500 futures were broadly steady after gains for Wall Street indices on Wednesday. Boston Federal Reserve bank leader Susan Collins told the New York Times that she was leaning towards a 25 basis-point hike.

Optimism for a more benign rates outlook and a pickup in demand as China emerges from strict Covid-19 restrictions kept oil prices near one-week peaks.

Brent crude futures topped $83 a barrel on Thursday before retreating slightly to trade flat on the day at $82.67.

US Treasuries added a little to Wednesday’s gains, sending benchmark 10-year yields down 4.4 basis points (bps) to 3.514%. German 10-year yields, the benchmark for the eurozone, fell 7 bps to 3.509%.

China hopes

Along with hopes that Western central banks will be gentler, investors are also banking on a recovery in China to help global growth, and are eyeing a potential policy shift in Japan.

The Bank of Japan (BOJ) stunned markets last month by widening the band around its 10-year bond yield target, a move that triggered a sudden rise in yields and a jump in the yen.

On Thursday, Yomiuri newspaper reported the BOJ will review the side-effects of the country’s ultra-easy settings sooner than expected — at next week’s policy meetings — and that it may take additional steps to correct distortions in the yield curve.

The yen rose as much as 0.9% and was last at 131.75/$. Ten-year government bond futures fell to almost eight-year lows.

Foreign exchange markets elsewhere were holding their breath before the US CPI data, while China’s reopening kept a floor under Asia’s currencies. The dollar index added 0.1% to 103.23, not far off a seven-month low of 102.93 recorded this week. The yuan traded near five-month highs at 6.7555/$.

China on Thursday reported declines in consumer prices in December and a larger-than-expected drop in factory gate prices — underscoring weakness in demand — which investors are betting will recover over the coming months.

“It’s not enough for China to come out of Covid to really turn the whole world economy around,” said Steven Wieting, chief investment strategist and chief economist at Citi Global Wealth Investments. “But it really weighs in the opposite direction.”

Reuters