By Ankur Banerjee
SINGAPORE (Reuters) – Stocks rose on Thursday and the dollar softened as easing core U.S. inflation kept potential rate cuts by the Federal Reserve on the table, while the yen hit a one-month high on growing expectations the Bank of Japan could raise rates next week.
European stock futures pointed to a subdued open after the pan-European STOXX 600 clocked its strongest daily performance in four months on Wednesday. STOXX 50 futures and UK FTSE futures were 0.3% higher.
Investor focus in Europe will be on luxury firms and chipmakers following strong earning from Cartier jewellery owner Richemont (SIX:CFR) and AI chipmaker Taiwan Semiconductor Manufacturing Co.
On Wall Street on Wednesday, all three major indexes registered their biggest daily percentage gains since Nov. 6 – the day after the U.S. presidential election – buoyed by strong earnings from JPMorgan, BlackRock (NYSE:BLK) and Goldman Sachs.
Asian stocks followed suit on Thursday, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 1.2%.
The relief rally in risk assets stemmed from a benign U.S. inflation report that showed the consumer price index rose in line with expectations at an annual rate of 2.9% in December, while core inflation, which excludes food and energy prices, rose by 3.2%, below forecasts for 3.3%.
Investors were encouraged by the inflation reading, particularly since data released on Tuesday showed that U.S. producer prices had increased moderately in December.
“This report supports the view that the pricing out of rate cuts this year has gone a bit too far, and when the data turns lower again … some extra easing will be put back on the table,” said Kyle Chapman, FX markets analyst at Ballinger Group.
The inflation report led traders to price close-to-even odds the Fed would cut interest rates twice by the end of this year.
That took some steam out of the dollar against most currencies, with the dollar index, which measures the greenback against six other units, at 109.07.
“We anticipate a shallow FOMC easing cycle, although we think short-term hawkishness is overdone,” said Eric Robertsen, Standard Chartered (OTC:SCBFF)’s global head of research and chief strategist at a media roundtable in Singapore.
“We see a higher USD, though the path is expected to be volatile,” said Robertsen, noting that U.S. economic strength will be tested if tariffs imposed by the incoming administration lead to weaker growth in other regions.
TRUMP AWAITS
Investor focus has centred on President-elect Donald Trump’s policies as he returns to the White House on Monday, with recent media reports of a more gradual implementation of tariffs easing some worries.
Analysts expect Trump’s policies to boost growth but also add to price pressures, putting the spotlight on Trump’s Jan. 20 inauguration speech, which politicians and policymakers will parse for clues to his policy plans.
Japan’s yen remained on the charge, hitting its highest in nearly a month after comments from Governor Kazuo Ueda as traders priced in a more than 70% chance the Bank of Japan will raise interest rates next week.
“While we expect the normally cautious Ueda to wait for clarity on U.S. trade policy and confirmation of strong wage growth until the BOJ’s March meeting, we acknowledge a hike is possible next week,” said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia (OTC:CMWAY).
The yen was last slightly stronger at 156.22 per dollar. The euro was steady at $1.0285, and sterling was 0.24% lower at $1.2215.
U.S. Treasury yields slid after the U.S. inflation data, with the yield on benchmark U.S. 10-year notes falling 13.5 basis points to 4.653%. It was last at 4.655%.
In energy markets, oil prices edged higher after a larger-than-expected decline in U.S. crude oil stockpiles added to concerns about possible supply disruptions from new U.S. sanctions on Russian energy trade. [O/R]
Investors will be keeping an eye on the developments in the Middle East as Israel intensified strikes on Gaza hours after a ceasefire and hostage release deal was announced to end fighting that began 15 months ago.
Spot gold hit a one month high of $2,702.09 per ounce in Asian hours after the shift in interest rate expectations.