Stocks shrug off inflation angst, yen bows to dollar
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[June 29, 2023] By
Marc Jones
LONDON (Reuters) - World shares and the dollar inched higher and gold
was at a three-month low on Thursday as traders' attention continued to
swing between the battle to lower inflation and speculation about
currency market intervention in China and Japan.
Europe's regional STOXX 600 index barely budged in early trading after
what had been its biggest rise in almost a month the previous day, while
futures markets were pointing to a fractionally higher start on Wall
Street later. [.EU][.N]
Sweden had already kicked the day off with another interest rate hike,
while one of its biggest firms and one of Europe's largest fashion
retailers H&M saw its shares hit a 16-month high after forecast-beating
results. [.EU]
It all tied in with the multi-trillion dollar question economists are
struggling with. Where is stubbornly high inflation heading?
Spain reported its annual inflation rate had dropped to 1.9% in June,
its lowest since March 2021. Equivalent numbers from Europe's biggest
economy, Germany, are due out too while the world’s top central bankers
were decamping from an ECB-hosted get-together near Lisbon.
"We are entering a delicate phase for monetary policy given the lags,"
S&P's Global Chief Economist Paul Gruenwald said as the firm predicted a
further rise in default rates in many parts of the world.
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"If inflation remains sticky, rates will need to go higher. But if
central banks have overtightened, growth will slow sharply."
Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside
Japan had fallen 0.5% with holidays in Singapore, India and Malaysia
making for thinner trading.
Chinese blue chips fell 0.3% and Hong Kong's Hang Seng index slumped
1.3%. Japan's Nikkei, however, gave up earlier gains to be up 0.1%
Most of the focus remained on the region's two biggest currencies,
Japan's yen and China's yuan, which have both been under intense
pressure in recent weeks.
The yuan eased to 7.2491 per dollar, just a whisker away from its
eight-month trough hit a day ago. That was despite another
stronger-than-expected official rate from the People's Bank of China,
which investors read as Beijing trying to steady the yuan.
Japan's yen, meanwhile, touched a more than seven-month low versus the
dollar. The dollar's surge of more than 11% against the yen since late
March has seen it reach 144.71 yen and prompted increased warnings from
Japanese government officials this week about the speed of the move.
The Bank of Japan intervened in the currency market last autumn when the
dollar strengthened beyond 145 yen. It was at 144.24 in European
trading.
"The playbook of verbal intervention is consistent with intervention
happening soon and if it gets above 145 we could quite easily get to see
them intervene again," said ING global head of markets Chris Turner.
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![](../images/062923PIX/busine95.jpg)
The German share price index DAX graph
is pictured at the stock exchange in Frankfurt, Germany, June 28,
2023. REUTERS/Staff
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Shane Oliver, chief economist at AMP in Sydney said though that
China might not mind its currency falling a bit further because it
helps support its giant export sector
"But they probably don't want it to fall too rapidly because then it
looks a bit like a panic," he added.
GERMAN ANGST
Overnight, U.S. share markets had ended broadly flat although the
high-flying Nasdaq had managed another small gain as Apple closed at
a fresh record high.
Federal Reserve Chair Jerome Powell had said in Portugal that U.S.
interest rates are likely to rise further and did not rule out a
July hike. Notably, he said he did not see inflation abating to the
2% target until 2025.
In the bond markets, European yields - a proxy for borrowing costs -
were inching up again.
In contrast to Spain's data, news that Nordrhein-Westfalen's
inflation rate had ticked up again bolstered expectations for
something similar from the German-wide figure later given that NW is
the country's most populous state.
Germany's 10 year bond yield, the benchmark for the currency bloc,
was 4.5 basis points (bps) higher at 2.36%, while the two-year yield
was up 4 bps at 3.21%.
Two-year U.S. Treasury yields were up at 4.759% too although still
below the 4.778% that had touched on Wednesday after Powell
comments. [GVD/EUR]
Futures see about an 80% chance the Fed will raise interest rates by
25 basis points in July, before holding rates steady for the
remainder of the year.
European Central Bank President Christine Lagarde, on the other
hand, further cemented expectations for a ninth consecutive rise in
euro zone rates in July. Markets have all but priced in two more
rate hikes from the ECB this year.
By contrast, Bank of Japan (BOJ) Governor Kazuo Ueda reiterated that
"there's still some distance to go" in sustainably achieving 2%
inflation, the conditions the BOJ has set for considering an exit
from ultra-easy stimulus.
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Investors are now awaiting the U.S. PCE index on Friday, the Fed's
favoured inflation gauge. Analysts polled by Reuters expect the core
rate to be 4.7% on a year-over-year basis, still well above the
Fed's 2% target.
"Markets seem stuck in a holding pattern, watching in awe the
inconsistencies between risk sentiment, yield curves, data surprises
and inflation," said Mark McCormick, global head of FX and EM
Strategy at TD Securities.
(Additional reporting by Stella Qiu in Sydney; Editing by Christina
Fincher)
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