Global stocks and futures climbed on Thursday morning ahead of the release of the latest US consumer price index data, which is expected to show some cooling in inflationary pressures. Investors are hopeful that slowing inflation will allow the Federal Reserve to take a less aggressive stance on interest rate hikes going forward.
Asian Markets Extend Gains
Shares in Asia built on recent momentum, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 0.9% in early trade. This marks the sixth consecutive session of gains for the benchmark, its longest winning streak since February.
The positive sentiment stemmed from reduced expectations for US rate hikes following more dovish commentary from some Fed officials this week. Both Boston Fed President Susan Collins and Atlanta Fed President Raphael Bostic indicated the central bank can start taking a more patient approach now that rates are nearing their peak levels.
“The less hawkish turn that we’ve seen from the Fed is in part to try and reduce the volatility that we’ve seen in rates markets and to try and bring expectations down to a more reasonable level,” said Mehvish Ayub, senior investment strategist at State Street Global Advisors.
In Japan, the Nikkei 225 rose 1.2% to hit a fresh one-month high, while Hong Kong’s Hang Seng index jumped 2.4% to an over three-week peak. Gains in Hong Kong were led by banking stocks after China’s state-owned Central Huijin Investment Ltd increased its stake in the country’s four biggest lenders.
US Futures Point Higher
Stock futures in the US also trended higher during Asian trade, suggesting the positive momentum could continue on Wall Street later in the day. Futures tied to the S&P 500 gained 0.4%, extending the benchmark’s winning streak to four sessions – its longest since mid-August.
The upcoming CPI report will help determine whether inflation is continuing to cool from four-decade highs hit earlier in the year. Economists forecast the headline consumer price index rose 8.1% in September from a year earlier, slowing from an 8.3% increase in August.
The core CPI, which excludes volatile food and energy costs, is projected to have risen 6.5% last month after a 6.3% annual increase in August. If the inflation data meets expectations, it would support the case for less aggressive tightening by the Fed going forward.
Yields Decline, Dollar Weakens
The tentative revival of risk appetite led to declines in safe haven assets like bonds and the dollar. The yield on the benchmark 10-year US Treasury note dipped 2 basis points to 4.10%, pulling back from the 14-year high of 4.33% reached earlier in October.
The US dollar index, which measures the greenback against a basket of currencies, slipped 0.2% to 112.40 – extending its slide to a seventh straight day. The dollar’s recent weakness came amid reduced rate hike bets and improving appetite for risk. The euro, yen, and pound all gained modestly against the dollar.
Meanwhile, oil prices retreated for a third consecutive session after a report that Iran may boost exports earlier than expected. Brent crude dipped 0.7% to $92.50 a barrel, giving up most of the gains seen at the start of the week.
Fed Policy Still Hinges on Inflation Outlook
While optimism over a potential Fed pivot has grown recently, policymakers maintain that rates will need to stay elevated for some time to bring inflation back down to the 2% goal.
The minutes from the Fed’s September meeting showed officials view risks from premature policy loosening as outweighing risks from overtightening. However, they did acknowledge uncertainty around the exact level of rates needed to sufficiently cool demand.
Several officials have stated that even after rates peak, they expect to hold at an elevated level through 2023 to ensure inflation continues trending down. Much will depend on how persistently core prices keep rising once the effects of individual shocks like the Ukraine war and supply chain snarls fade.
For now, investors are hopeful the CPI report will reinforce the narrative of peak inflation and allow the Fed to slow its aggressive tightening campaign. But there are still concerns that underlying price pressures remain sticky and more rate hikes lie ahead.
Upcoming Key Events
Looking ahead, Friday will see the start of the next quarterly earnings season with results from major US banks. Investors will be watching closely for commentary around the economic outlook and impact of higher rates.
On the data front, US jobless claims and August producer price inflation data are also due on Thursday. Other notable releases include Chinese trade figures on Friday and the University of Michigan’s preliminary October consumer sentiment survey.
Fed officials due to speak in the coming days include Raphael Bostic, Patrick Harker and Neel Kashkari. Markets will be listening closely for any further clues about potential changes to the policy outlook.
Overall, while the recent market rally indicates investors anticipate an easing in Fed policy as inflation cools, upcoming data and communications will determine whether this narrative plays out. There are still significant risks of higher rates and volatility if price pressures prove more persistent than expected.