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SYDNEY (Reuters) – Asian shares and bonds rallied on Thursday while the dollar nursed heavy losses, as a surprisingly low reading on U.S. inflation reinforced bets the end of the Federal Reserve’s post-pandemic tightening cycle is in sight.
European stocks looked set for a more cautious open, however, with EUROSTOXX 50 futures flat. S&P 500 futures and Nasdaq futures were little changed.
Investors in Asia shook off dismal China trade data, which showed both exports and imports contracted at a worse-than-expected pace last month, betting that the latest bad news will trigger more stimulus measures.
MSCI’s broadest index of Asia-Pacific shares outside Japan surged 1.8%, bolstered by a 2.6% jump in Hong Kong’s Hang Seng index and a 1.7% gain in Australia’s resources-heavy shares.
Japan’s Nikkei rose 1.5%.
Chinese tech giants listed in Hong Kong rallied 3.5% after Premier Li Qiang urged the companies to support a slowing economy, adding to signs that a years-long crackdown on the sector is over.
Overnight, the much-watched U.S. consumer inflation report provided better news than markets had hoped for. The Consumer Price Index (CPI) rose 3% in June from a year ago, below expectations for a gain of 3.1% and a world of difference from 9.1% in the same month last year.
In particular, core inflation, which the Fed has feared to be sticky, also showed a sharper-than-expected slowdown.
“With the usual caveat of one month not making a trend, the narrow path to a soft landing looks a smidgeon wider this morning,” said Michael Feroli, chief U.S. economist at JPMorgan.
“There may be a few doves on the FOMC who would be willing to see how far this process can run without additional tightening, but we expect that the Fed leadership is still strongly inclined to hike in two weeks… before the Committee goes on extended pause.”
Indeed, futures still imply a 94% probability of a quarter-point hike from the Fed later this month, but have pared back the risk of another hike in September to 13.2%, from 22.3% a day earlier, according to CME FedWatch Tool.
Futures also moved to imply an earlier first rate cut, in March next year, and were pricing in a total of 125 basis points (bps) in cuts in 2024.
Bonds heaved a sigh of relief after a rout last week sent global yields sharply higher. The 10-year Treasury yield was at 3.8614% in Asia, having dived 12 bps (bps) overnight and down from a seven-month top of 4.0940% on Friday.
Rate-sensitive two-year yields slipped 3 bps to 4.7146% in Asia, after plunging 15 bps overnight. That led to a steepening in the yield curve.
The U.S. dollar slumped to a fresh 15-month low against its major peers, taking off pressure on emerging market currencies and giving Asian policymakers more scope to ease monetary policy. [FRX/]
The euro touched a new 15-month top of $1.1144 on Thursday, after surging 1.1% overnight on bets of a more hawkish European Central Bank now that Fed is expected to be almost done hiking.
The Japanese yen, which had come under massive selling pressure due to Japan’s ultra easy monetary stance, gained more than 6 yen on the dollar in nine sessions and was last at 138.74 per dollar.
“The Fed’s leadership in the global rate cycle will increasingly play against the dollar, as central banks pivot from rate hiking to rate cutting,” said Alan Ruskin, chief international strategist at Deutsche Bank.
In Canada, risks remain tilted towards more tightening. The Bank of Canada on Wednesday raised rates by a quarter-point to 5%, and the governor did not shy away from saying that it was prepared to do more.
Elsewhere, oil prices settled near the highest in two months on a soft U.S. dollar. Brent crude futures rose 0.3% to $80.38 per barrel and U.S. West Texas Intermediate crude futures were up 0.3% at $75.96.
Gold prices were little changed at $1,956.39 per ounce.
