Asian stocks rose as traders shrug off inflation surprise. Photo by Scott Graham on Unsplash
Asian stocks rose as traders shrug off inflation surprise. Photo by Scott Graham on Unsplash
Reuters: Asian stocks rose on Thursday, as traders figured a small upside surprise for U.S. inflation was unlikely to push up interest rates, while the euro was firm leading in to a European Central Bank meeting where expectations lean toward a rate hike.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6% for its best session in a week and a half. Tokyo’s Nikkei rose 1.4% to a one-week high. India’s BSE Sensex rose 0.5% to a fresh record peak. S&P 500 futures rose 0.3%, while FTSE futures and European futures each rose 0.2%.
Wednesday data showed higher fuel prices had lifted headline U.S. consumer prices by the most in 14 months in August for an annual rate of 3.7%, which was a touch above expectations. Core inflation slowed to an annual 4.3%, as expected. Treasury yields initially spiked higher, as did the U.S. dollar, before both retraced the moves.
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Benchmark 10-year Treasury yields finished the New York session a bit more than a basis point lower and fell by a further two bps in Asia to 4.23%. Two-year yields spiked above 5%, but were last at 4.96%. “I think markets are largely prepared for a rebound in inflation, given rapidly rising global energy prices,” said Glenn Yin, head of research and analysis at AETOS Capital Group in Melbourne. “It does feel like the highly anticipated Fed pause next week is outweighing the fact that inflation has risen at the fastest pace in more than a year.”
Fed funds futures hardly budged on the inflation data, and imply nearly no chance of a rate hike next week, and about a 45% chance of another hike by year’s end. Thursday’s European Central Bank meeting is next on the horizon, with markets pricing about a 65% chance of a hike that takes Europe’s key interest rate to a record peak. However analysts see risks to the downside for the common currency – last marginally firmer at $1.0747. “Either the ECB surprises by not hiking, or they deliver a very dovish late cycle hike,” said Brent Donnelly at Spectra Markets. “Either way, it’s not bullish euro,” he said.
Around Asia, stock market moves were mostly modest, with the Hang Seng and mainland Chinese markets trading either side of flat, with China electric vehicle shares a drag after the European Commission announced a probe into subsidies. In foreign exchange markets, the dollar was slightly sold, and the Australian dollar was boosted by a surge in employment in August. It was last about 0.2% higher at $0.6435, though interest rate expectations were little changed.
The New Zealand dollar was also firmer at $0.5929, while the dollar slipped about 0.2% to buy 147.13 yen. The yen has mostly handed back gains made after Bank of Japan Governor Kazuo Ueda hinted at the conditions for an end to negative short-term rates, as traders figure on any exit being slow and the gap with U.S. rates remaining wide. China’s yuan was steady at 7.2747 per dollar.
China’s central bank has asked some of the country’s biggest lenders to refrain from immediately squaring their foreign exchange positions in the market, and to run open positions for a while in order to alleviate downside pressure on the yuan, two sources with knowledge the matter told Reuters. In the U.S. session on Thursday chip designer Arm Holdings begins trading, after a $51-a-share float gave it a valuation of $54.5 billion. Retail sales data are also due.
In commodity markets oil is on a tear as Saudi Arabia and Russia extend production cuts to the end of 2023. Brent crude futures are up 30% in three months to $92.32 a barrel. “The market remains beholden to Saudi Arabia’s oil policy,” said analysts at ANZ Bank, who said if cuts were extended into the first half of next year, Brent prices could hit $100. Gas markets were skittish as strikes began at production projects in Australia that account for more than 5% of global supply. On Wednesday benchmark European gas prices were up 6.5%.
Reuters: The U.S. dollar hovered below a three-month high to the euro on Thursday as attention turned to the European Central Bank’s rate-setting meeting later in the day, after U.S. inflation data failed to alter views for a Federal Reserve pause next week. The yen pulled away from near a 10-month trough to the dollar as a decline in long-term Treasury yields removed some support for the U.S. currency. Australia’s dollar popped to a one-week high after strong employment figures, but then quickly retraced most of the advance as the data showed the vast majority of new jobs were part-time.The U.S. dollar index – measuring the currency against a basket of six developed-market peers, including the euro and yen – edged 0.1% lower to 104.63 in the Asian morning.
The euro added 0.1% to $1.07415, continuing its grind higher from last week’s low of $1.0686. The dollar slipped 0.2% to 147.125 yen, falling back from near last week’s peak of 147.875. The benchmark 10-year Treasury yield eased a further basis point to around 4.24% in early Thursday trading, extending a 1.6 bps decline from the previous session, when it also at one point surged to a three-week top at 4.352%. The U.S. consumer price index increased by 0.6% last month, the largest gain since June 2022, the Labor Department said on Wednesday.
However, core inflation, which is of greater concern to the Fed as it strips out food and energy prices, ran at a 4.3% year-on-year rate in August from 4.7% the previous month. Traders remain almost certain the Fed will keep rates steady again on Sept. 20, according to money market pricing. Odds for a quarter point increase by year-end though, stand at about 40%.
Meanwhile, wagers for a hike by the ECB later on Thursday now stand at about a two-in-three probability currently, from closer to a coin toss earlier in the week, bolstered partly by a Reuters report that Europe’s central bank expects inflation will stay above 3% next year in its updated forecasts, far exceeding the 2% target.
The Fed’s November meeting will be “a pivotal event,” with a run-up in crude oil prices adding to the risk of another hike, potentially buoying the dollar, said James Kniveton, a senior corporate foreign-exchange dealer at Convera in Melbourne. “It is premature to assert that USD bears have assumed control,” he said. At the same time, a hike by the ECB “could potentially catalyse a shift in momentum, relegating the dollar to a secondary position as the euro gains traction,” he added.
Meanwhile, the Australian dollar rose as much as 0.5% to the highest since Sept. 5 at $0.64545 after figures showed the economy added a consensus-beating 64,900 jobs in August. However, 62,100 of those jobs were part-time, and that detail saw a rapid paring of initial gains, with the currency last trading 0.1% higher at $0.64285.
FXStreet: The GBP/USD pair consolidates in a narrow range around 1.2490 during the early Asian session on Wednesday. The major pair remains capped by the 1.2500 barrier ahead of the US economic data released. Tuesday’s data indicated a bigger rise in the unemployment rate than anticipated, but the BoE remains concerned that wage growth will sustain persistent inflation. The UK’s Office for National Statistics revealed that the UK Unemployment Rate in the three months to July came in at 4.3% from 4.2% in the previous reading, Meanwhile, Employment Change for July declined by 207K from a 66K drop in the previous reading, worse than the estimated 185K drop.
The Average Earnings Including Bonus in the three months to July rose by 8.5% versus 8.2% prior. Excluding bonus, the figure remains at 7.8%, as expected. Additionally, the UK Gross Domestic Product declined 0.5% MoM in July, following a 0.5% expansion in June and a worse-than-expectation 0.2% drop. The speed of the slowdown fuels the concern about the potential recession in the UK economy.
Catherine Mann, a Bank of England policymaker, stated on Monday that it was too early for the central bank to pause interest rates and that it was preferable for the central bank to err on the side of raising them too high rather than halting too soon. However, The British Pound attracts some sellers as investors are concerned about the aggressive tightening cycle that will impact the UK economy.
Across the pond, the US Bureau of Labor Statistics showed on Wednesday that the headline inflation in August hit the highest monthly gain in 14 months with the US Consumer Price Index rising 0.6% MoM from 0.2% in the previous reading. The annual figure came in at 3.7% from 3.2%, better than expected. The core CPI, which excludes volatile food and energy prices climbed 0.3% MoM from 0.2% in the previous month. The annual core CPI came in at 4.3% versus 4.7% prior.
Markets believe that the Federal Reserve will hold interest rates unchanged at next week’s FOMC meeting. However, the figures imply that the Fed should be on the lookout for any re-acceleration in inflation in the next months. According to the CME Fedwatch Tool, investors have priced in 97% odds of interest rate unchanged in September at 5.25%-5.50%. However, the possibility of a rate hike in the November meeting increased to 49.2%.
In the absence of economic data released from the UK docket on Wednesday, the GBP/USD pair remains at the mercy of USD price dynamics. Market participants will keep an eye on the release of the US weekly Initial Jobless Claims, the Producer Price Index and monthly Retail Sales due later in the day. On Friday, the preliminary Michigan Consumer Sentiment Index for September will be due. These figures could give a clear direction to GBP/USD and traders will find the trading opportunities around the major pair.
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Reuters: South Africa’s rand slipped early on Wednesday, as focus turned towards U.S. inflation data that could provide more clues on the Federal Reserve’s interest rate path. At 0610 GMT, the rand traded at 18.9400 against the dollar, about 0.16% weaker than its previous close. The dollar index was last up 0.16% against a basket of currencies.
“Focus for the day ahead will be on the US inflation numbers, which carry two-way risks for the market given the uncertainty surrounding the Fed’s outlook,” ETM Analytics said in a research note. Like most other emerging market currencies, the risk-sensitive rand tends to take cues from global economic drivers such as U.S. monetary policy in the absence of local data points. South Africa’s benchmark 2030 government bond slipped in early deals, with the yield up 5 basis points to 10.405%.
Published by the Mercury Team on 14 September 2023
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