LDN - Business

Inflation gyrations keep investors guessing

[February 15, 2023] By Marc Jones

LONDON (Reuters) - It was another day on inflation patrol for investors on Wednesday as stickier-than-expected U.S. data nudged stocks down and the dollar up, while a slowdown in Britain’s price rise rate sent the pound tumbling.

Asia had been largely focused on the read-across for global interest rates of Tuesday's 6.4% U.S. consumer inflation reading but Europe's moves were initially dominated by figures showing UK inflation easing to 10.1% from 10.5%.

It pushed the pound back under $1.21 versus the dollar and saw the biggest drop in 10-year UK Gilt yields in almost two weeks, albeit after two sizable rises in bond yields globally in the last few sessions.

Oil prices were dropping again, too, on demand worries, as were banking shares as one of Britain's biggest lenders, Barclays, saw its shares sink over 8% after it revealed a string of problems.

Gucci owner Kering also fell as much as 2% after its results, although 0.4%-0.5% gains in the tech and telecoms sectors, and by chemicals and auto firms, meant European stocks were little changed overall.

"Today’s UK inflation data will likely be met with sighs of relief," Hugh Gimber, a global market strategist at J.P. Morgan Asset Management, said referring to the Bank of England's rate setting committee.

Strong wage increase data this week, which posted the 12th consecutive month of stronger than anticipated growth, showed that inflationary pressures remain strong overall, however.

"We see interest rates of 4.5% as the minimum required to return inflation to target over the coming quarters," Gimber added.

Despite Europe's resilience, MSCI's 47-country world share gauge was 0.2% in the red with S&P 500 futures markets also pointing to Wall Street heading 0.3% lower later.

Headline U.S. consumer inflation came in at 6.4% year-on-year for January on Tuesday, a bit higher than the 6.2% economists had expected, setting off selling in the bond market and Fed funds futures as hopes that rates could be cut later this year grew dimmer.

Fed funds futures now imply a peak above 5.2% by mid-year and rates above 5% at year's end.

Two-year Treasury yields, which rise when the price of the underlying bond falls, steadied at 4.59% in Europe after climbing up to 4.61% overnight. It had also widened the premium or 'inversion' over 10-year rates - an unusual phenomenon that historically often signals an approaching recession.

SWIMMING IN OIL

Turkey's stock index rose almost 10% on Wednesday after it had been closed for five days in the wake of the country's devastating earthquake that has now claimed more than 40,000 lives in Turkey and neighbouring Syria.

Turkish authorities introduced a series of measures on Tuesday to support the market, including some that encouraged pension funds to buy up stocks.

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Monitors displaying the stock index prices and Japanese yen exchange rate against the U.S. dollar are seen after the New Year ceremony marking the opening of trading in 2022 at the Tokyo Stock Exchange (TSE), amid the coronavirus disease (COVID-19) pandemic, in Tokyo, Japan January 4, 2022. REUTERS/Issei Kato

MSCI's broadest index of Asia-Pacific shares outside Japan ended down 1.4%, led by drops of more than 1% in Australia and Hong Kong. Japan's Nikkei share average sank, reversing a small early gain.

After a strong start to the year, analysts are bracing for a further retracement.

"If I combine this earlier (U.S.) Fed rhetoric trying to keep the rates higher for longer and the recent CPI number...then it seems likely that there should be some degree of moderation in the equity markets, both developed markets and Asian markets," said Manishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas.

He said the dollar might also regain some strength over emerging market currencies, helped by the prospect of U.S. rates staying elevated.

The dollar had touched a six-week high of 133.30 Japanese yen overnight and hovered at 133.05 yen on Wednesday. It had a bumpier ride against other currencies following the CPI data, but seems to be pausing following a January slide.

The Australian dollar eased a bit to $0.6938 even as central bank Governor Philip Lowe reiterated that Aussie rates would need to rise further.

Going in the other direction, China's central bank ramped up its liquidity injections by rolling over maturing policy loans and adding more funds, while keeping the interest rate unchanged.

Oil prices fell, meanwhile, as traders worried about mounting supplies and the prospect of higher interest rates slowing the global economy and weakening demand.

U.S. crude stocks rose by a more-than-forecast 10.5 million barrels, according to market sources citing American Petroleum Institute (API) figures, ahead of official Energy Information Administration (EIA) data out at 1530 GMT.

Brent crude futures slid $1.13, or 1.3%, to $84.45 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped $1.31, or 1.7% to $77.75.

Also putting downward pressure on crude was the U.S. announcement this week that it would sell 26 million barrels of oil from the nation's strategic reserve, which is already at its lowest level in roughly four decades.

"Simply put, the U.S. is swimming in oil," said Stephen Brennock of oil broker PVM.

(Additional reporting Xie Yu in Hong Kong and Alex Lawler in London; Editing by Kim Coghill)

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