Global stocks shrug off inflation fears

World shares and the dollar inched higher while 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 by 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.

Sweden had already kicked off with another interest rate hike, while H&M — one of its biggest firms and one of Europe’s largest fashion retailers — saw its shares hit a 16-month high after forecast-beating results.

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, the lowest since March 2021. Equivalent numbers from Germany, Europe’s biggest economy, 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, whose firm predicts a further rise in default rates in many parts of the world. “If inflation remains sticky, rates will need to go higher. But if central banks have overtightened, growth will slow sharply.”

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan had fallen 0.5% overnight with holidays in Singapore, India and Malaysia making for thinner trading.

Chinese blue chips fell 0.3% and Hong Kong’s Hang Seng slumped 1.3%. Japan’s Nikkei, however, pared earlier gains but was up 0.1%

Most of the focus remained on the region’s two biggest currencies, Japan’s yen and China’s yuan, which have been under intense pressure in recent weeks.

The yuan eased to 7.2491/$, just short of 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.

The yen, meanwhile, touched a more than seven-month low. The dollar’s surge of more than 11% against the yen since late March has seen it reach ¥144.71/$ 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. It was quoted at ¥144.24 in European trading.

“The playbook of verbal intervention is consistent with intervention happening soon and if it [the yen] gets above 145 we could quite easily get to see them intervene again,” said ING global head of markets Chris Turner.

Shane Oliver, chief economist at AMP in Sydney said 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

US share markets had ended broadly flat overnight though the high-flying Nasdaq managed another small gain as Apple closed at a fresh high.

Federal Reserve Chair Jerome Powell had said in Portugal that US 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 North Rhine-Westphalia’s inflation rate had ticked up again bolstered expectations for something similar from the German-wide figure later given it 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 US Treasury yields were up at 4.759%, though still below the 4.778% on Wednesday after Powell’s comments.

Futures see about an 80% chance the Fed will raise interest rates by 25 bps in July, before holding rates steady for the remainder of the year.

European Central Bank (ECB) President Christine Lagarde further cemented expectations for a ninth consecutive rise in eurozone 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.

Investors are now awaiting the US PCE index on Friday, the Fed’s favoured inflation gauge. Analysts expect the core rate to be 4.7% year on year, 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.

Reuters