Stocks rise ahead U.S. inflation tests
By Danilo Masoni & Tom Westbrook
MILAN (Reuters – Stocks gained modestly on Thursday, fueled by cautious optimism that U.S. data would confirm that inflation is falling. The yen also rose due to expectations that the Bank of Japan will examine the side effects of its ultraeasy policy.
A MSCI gauge for world stocks.MIWD00000PUS rose 0.4% ahead of data which is expected to show that U.S. consumer inflation slowed to 6.5% in December from 7.1% last month. Core inflation, USCPFY=ECI was at an annual 5.7%, down from the 6% month before. The USCPI=ECI is at zero month-on-month headline inflation.
Bonds rose as well, reflecting hopes for a softer inflation report. The U.S. dollar was at its lowest level in seven months against a basket currency. Europe’s STOXX 600.STOXX equity index benchmark index increased 0.6% to its highest point since April 2022.
Markets will be influenced by U.S. data at 1330 GMT. This will influence market expectations about the pace of interest rate increases in the world’s largest economy. The markets have priced in a better-than-even chance that the Federal Reserve will raise rates by 25 basis points rather than 50 at its February meeting.
“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 U.S. CPI has the ability to shape the next month,” wrote Deutsche Bank strategist Jim Reid.
He said that “the latest CPI releases have shown two downside surprises in a row for CPI for the first time ever since the pandemic,” adding that there are growing hopes that the Fed will achieve a soft landing.
Roberto Lottici is the portfolio manager at Banca Ifigest. He expressed concern that markets might react negatively to any major downside surprise in U.S. CPI data.
“An inline number will not give the rally more energy. A slightly lower number could increase the rise for a few more sessions. However, if it is too low it could be misinterpreted as a sign that there is an economic slowdown,” he stated.
The MSCI’s largest index of Asia-Pacific shares,.MIAPJ0000PUS, rose 0.3% after rising to a seven-month peak. Japan’s Nikkei.N225 remained steady.
S&P 500 futures ESc1 were broadly steady following gains for Wall Street indexes on Wednesday. Susan Collins, the president of Boston Federal Reserve Bank, said to the New York Times she leans towards a 25 basis-point hike.
Oil prices reached new highs this week due to optimism for more favorable rates and increased demand after China lifts its strict COVID restrictions. O/R
Brent crude oil futures LCOc1 rose 1.2% to 83.62 per barrel on Thursday.
U.S. Treasuries increased Wednesday’s gains, driving benchmark 10-year yields US10YT=RR by 3.2 basis point (bps) to 3.524%. German 10-year yields DE10YT=RR (the benchmark for the eurozone) fell 5 basis points to 2.135%. Yields change in the opposite direction to bond prices.
CHINA HOPES
Investors are expecting the West’s central banks to be more gentle. They also believe that a recovery in China will help global growth.
Last month, the Bank of Japan shocked markets by increasing the band surrounding its 10-year bond yield target. This move triggered an abrupt rise in yields as well as a jump in yen.
On Thursday. Japan’s Yomiuri newspaper reported Thursday that the BOJ will examine the side-effects Japan’s extremely easy settings sooner than anticipated – at next weeks policy meetings – as well as taking additional steps to correct distortions within the yield curve.
After breaking key levels, the yen JPY=EBS rose as high as 1.2%. It was last at 130.99 dollars. The Japanese 10-year government bond futures 2JGBv1 dropped to their lowest level since May 2014.
The U.S. CPI data was quieter than foreign exchange markets elsewhere, while China’s opening kept Asia’s currencies in check. The dollar index=USD dropped 0.1% to 103.66, not far from the 7-month low of 102.93. The yuan CNY=CFXS traded at 6.7499 per $1, five months after its highs.
China reported Thursday that December saw a drop in consumer prices and a greater than expected drop in factory gate price. This indicates weakness in demand. Investors are hoping the market will rebound in the coming months.
Steven Wieting, chief economic strategist at Citi Global Wealth Investments, stated that it is not enough for China’s exit from COVID to turn the world economy around. It really does weigh in the opposite direction.”
(Reporting by Danilo in Milan and Tom Westbrook, Singapore; Editing By Tomasz Janowski