Wall Street, Asian stocks jump as slowing US inflation dampens Fed rate hike bets; Treasury yields fall

Stocks extended their rally on Thursday following weaker-than-expected U.S. inflation data, fueling speculation that the Federal Reserve may adopt a slower pace of interest rate hikes. Equities rose around 1% in Australia and South Korea, while Hong Kong futures rose by a similar amount. US and European contracts were in the green after the S&P 500 hit a three-month high and the tech-heavy Nasdaq 100 pulled 20% above a June low. The dollar suffered losses on the back of optimism in the US session, which saw the greenback’s gauge pull back the most since the start of the pandemic.

Short-term Treasury yields fell on Wednesday as investors lowered their expectations of how aggressively the Fed will need to tighten monetary policy. There is no cash treasury bill trading in Asia on Thursday due to a public holiday in Japan. Crude oil held most of a jump above $91 a barrel, while Bitcoin rose above $24,000 in a sign of better market sentiment.

Also Read: US Inflation Drops More Than Expected in July to 8.5% as Gasoline Gets Cheaper, Eases Pressure on Fed

Headline inflation in the United States was 8.5% in July, down from 9.1% in June, the largest increase in four decades. It’s still high and Fed officials were quick to point out that more rate hikes are coming. They also signaled that investors should rethink expectations for cuts next year to support economic growth. The question is whether the rebound in global equities and other riskier investments from this year’s rout can continue in this environment.

“We still need to see a few more monthly declines in underlying inflation before the FOMC can start thinking about pausing its tightening cycle,” Carol Kong, strategist at Commonwealth Bank of Australia Ltd., told Bloomberg Television. . “The market is still currently underestimating US inflation and its medium-term stickiness.”

Fed-Speak

Minneapolis Fed Chairman Neel Kashkari said he wants the Fed’s benchmark interest rate to be 3.9% by the end of this year and 4.4% by the end of this year. by the end of 2023. Alluding to market pricing of the Fed’s policy trajectory, Kashkari said it was unrealistic to conclude that the Fed will start cutting rates early next year, when inflation will most likely be well above the 2% target. His Chicago counterpart, Charles Evans, said inflation remained “unacceptably high” and that “we will be raising rates the rest of this year and next year.”

Financial conditions

“The easing of financial conditions is probably annoying the Fed, and we shouldn’t be surprised to see Fed speakers continue to try to disparage the market and risky assets,” said Christian Hoffmann, portfolio manager at Thornburg. InvestmentManagement. Swaps referencing the Fed’s September meeting staked a half-point rate hike instead of a larger move. A key part of the Treasury yield curve remains deeply inverted, a pattern widely seen as signaling the risk of a recession. Meanwhile, in China, the central bank said it would shield the economy from inflation threats, pledging to avoid massive stimulus and excessive money printing to spur growth.

Also read: Nifty could reach 17650 if it holds above 17450 support, but a rally towards 17750 could lead to selling pressure

What to watch this week:

– US PPI, first jobless claims, Thursday
– San Francisco Fed President Mary Daly is interviewed on Bloomberg Television on Thursday
– Euro zone industrial production, Friday
– American University of Michigan Consumer Sentiment, Friday
– Some of the major movements in the markets:

Shares
– S&P 500 futures rose 0.2% at 9:50 a.m. in Tokyo. The S&P 500 rose 2.1%
– Nasdaq 100 futures rose 0.3%. The Nasdaq 100 rose 2.9%
– The Australian S&P/ASX 200 index jumped 0.8%
– South Korea’s Kospi index added 1.4%
– Hang Seng index futures advanced 1.1% earlier

Currencies
– The Bloomberg Dollar Spot Index remained stable
– The euro was at $1.0301
– The Japanese yen was at 132.84 per dollar
– The offshore yuan was at 6.7301 to the dollar, down 0.1%

Obligations
– The yield on 10-year Treasury bills was little changed at 2.78% on Wednesday

Goods
– West Texas Intermediate crude was at $91.57 a barrel, down 0.4%
– Gold was at $1,790.82 an ounce, down 0.1%

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