LDN - Business

Global shares cautiously higher ahead of U.S. core inflation data

[October 27, 2023] By Naomi Rovnick and Stella Qiu

SYDNEY (Reuters) -Global shares rose on Friday after data showed the U.S. economy was growing robustly and traders awaited a U.S. core inflation report later in the session that may show price pressures are continuing to abate.

MSCI's all-country equity gauge rose 0.2% following reassuring news on Thursday that the U.S. economy expanded at its fastest rate for almost two years in the third quarter, while the European Central Bank (ECB) also held interest rates steady.

Futures tracking Wall Street's tech-heavy Nasdaq 100 index added 0.7% in response to Amazon beating sales estimates. Europe's Stoxx 600 share index was 0.3% lower.

The yield on the 10-year U.S. Treasury, which moves inversely to the price of the debt security and functions as a benchmark for global borrowing costs, rose 3 basis points (bps) to 4.845% after scaling 5% earlier in the week

Economists expect a report on Friday to show U.S. core personal consumption expenditure, the Federal Reserve's favoured inflation measure, declined to 3.7% in September from 3.9% a month earlier.

Still, analysts noted that any signal central banks' recent victories against inflation were losing ground could renew speculation about even more rate hikes to come.

"This is a bond market that at the moment doesn't need much of an excuse to fire a tantrum," said Simon Harvey, head of FX analysis at Monex Europe.

The 10-year yield, which can hit stock prices when it rises by varying the discount rate investors use to value companies' future cashflows, has climbed from around 4% in early August.

The Fed holds its next interest rate-setting meeting next week. The world's most influential central bank is widely expected to keep its funds rate in a range of 5.25%-5.5%, although chair Jay Powell has said a strong economy and tight jobs market could warrant more rate rises.

And while the ECB on Thursday also held its deposit rate at a record high of 4%, president Christine Lagarde signalled in comments after the decision that further monetary tightening was possible.

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An electronic board shows stock indexes at the Lujiazui financial district in Shanghai, China, March 21, 2023. REUTERS/Aly Song/File Photo

The ECB had adopted "a somewhat hawkish wait and see stance," said Martin Wolburg, senior economist at Generali Investments, noting that a slowing euro zone economy was not a one-way street to rate cuts now oil prices were rising.

"In the current environment, uncertainty for monetary policymaker has increased significantly," he said.

Amid growing concerns that the Israel-Hamas conflict could spread more widely, two U.S. fighter jets struck weapons and ammunition facilities in Syria on Friday in retaliation for attacks on U.S. forces by Iranian-backed militia.

Brent crude futures climbed 1.6% to $89.30 a barrel on Friday, now 6% higher since Hamas militants burst out of Gaza to attack southern Israel on Oct. 7.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan bounced 0.9% after hitting a fresh 11-month low on Thursday.

In currency markets, the euro was steady at 105.56 per dollar, now down almost 14% in the last three months.

Thanks to rate rises and a robust U.S. economy, the index that measures the dollar's strength against competing currencies has risen almost 5% in three months and was on Friday on track for a 0.4% weekly gain.

The yen hit a fresh one-year low of 150.77 per dollar overnight and was last at 150.25. It was not far off the three-decade low of 151.94 it touched in October last year that led Japanese authorities to intervene to prop up the currency.

In recent weeks the Bank of Japan has also intervened heavily in its bond market to suppress yields, pitting itself against market forces as global rates have risen.

The BoJ will face pressure at its meeting next week to shift away from bond yield control, with any nod to tighter Japanese policy potentially strengthening the yen and encouraging domestic investors to sell overseas assets.

(Reporting by Stella Qiu; Editing by Sam Holmes and Jamie Freed)

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