Stocks rise as dollar eases ahead of U.S. inflation data

[December 12, 2023]  By Amanda Cooper

LONDON (Reuters) -Global stocks rose on Tuesday, while commodities such as oil and gold edged up on the back of a weaker dollar ahead of U.S. inflation figures that could set the tone for trading in a week filled with central bank meetings.

The U.S. Federal Reserve is widely expected to hold rates on Wednesday, with the spotlight squarely on comments from Chair Jerome Powell during his news conference, as well as the central bank's economic projections.

Before that, the U.S. Labor Department's Consumer Price Index (CPI) report on Tuesday is expected to show inflation still cooling, but staying well above the Fed's 2% annual target, with core CPI expected to come in at 4%.

Equities have rattled higher, while bond yields have fallen in recent weeks on the back of growing investor conviction that interest rates are about to fall quite swiftly, as the U.S. economy in particular coasts towards a soft landing.

"The market, in my view, now wants to enjoy a bit of a rally on the back of increasing Fed rate-cut expectations. The problem I have now is I think we've basically reached the limit of how much the Fed can cut, i.e., what's priced into the curve without introducing a significant recession risk," said Kallum Pickering, senior economist at Berenberg.
 

Caution among investors has tempered volatility. Headline inflation has cooled more quickly than many expected, including consumers, who, a year ago predicted price pressures would be running at a rate of 4.2% at this point, versus 3.2% right now, based on the University of Michigan's monthly one-year inflation expectations index.

But other components of the CPI report have proven far stickier. One such gauge, the owners' equivalent rent - which measures the change in the cost of shelter for homeowners - is at 6.8%, having peaked only in April this year at 8.2%, compared with the peak in the headline at 9.1% back in April 2022. Wage growth has slowed, but is still at 4%.

The MSCI All-World index, which is trading around four-month highs, was 0.2%. In Europe, the STOXX 600 <.STOXX > held in positive territory, while U.S. index futures rose 0.1-0.2%.

Markets are now pricing in a 48% chance of a rate cut in March compared with 57% a week earlier, according to CME FedWatch tool. Futures show traders expect at least four quarter-point cuts next year.

FAST AND LOOSE

Financial conditions have loosened since the Fed met in November and that will most likely influence the central bank's thinking, analysts said.

The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville/File Photo

"The Fed will feel that it cannot afford to have financial conditions ease further, as that could potentially re-accelerate labour demand and put renewed upward pressure on the rate of consumer inflation," said Erik Weisman, chief economist and portfolio manager at MFS Investment Management. "Whether the market takes the hint remains to be seen and will likely be driven by the unfolding macro data more than Fed jawboning."

In a busy week for central banks, the European Central Bank, Bank of England, Norges Bank and the Swiss National Bank all meet on Thursday.

The yield on 10-year Treasury notes fell 4.6 basis points to 4.192% after lacklustre three- and 10-year note auctions on Monday.

Investors were reluctant to buy Treasuries in the auctions given thinner liquidity with the inflation data and the Fed meeting coming up.

The Treasury Department will sell $21 billion in 30-year reopened bonds on Tuesday, after Monday's auction of $50 billion in reopened three-year notes and $37 billion in 10-year notes.

In currency markets, the yen recovered some of the previous day's losses, which were triggered by a Bloomberg report that cited sources as saying Bank of Japan officials saw little need to exit their negative-rates policy straight away. The yen surged last week against the dollar, driven by brief optimism that a shift could come as early as this month.

The yen strengthened 0.46% to 145.51 per dollar, recouping some of Monday's 0.8% decline. The BOJ meets next week. [FRX/]

The dollar index, which measures the U.S. currency against six others, fell 0.21% to 103.84.

Gold edged higher after touching a three-week low in the previous session and was last up 0.2% at $1,985 an ounce, while Brent crude futures held steady at $76 a barrel.

(Reporting by Ankur Banerjee; Editing by Lincoln Feast, Kim Coghill and Gerry Doyle)

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