LONDON, Feb 21 — Global shares inched up yesterday as a US holiday tempered volatility ahead of minutes of the latest Federal Reserve meeting even though data on core inflation has raised the risk of interest rates heading higher for longer.
The dollar, which is this month on track for its largest one-month rise since September, eased a touch, reflecting a retreat in risk aversion among investors.
With US markets shut for the Presidents’ Day holiday, non-US assets got some respite from the relentless pressure of last week.
The MSCI All-World index rose 0.2 per cent, helped by modest gains in Europe, where the STOXX 600 rose 0.1 per cent, as gains in mining shares offset a decline in the tech sector.
A surge higher in both stock and bond prices in the first six weeks of the year came to a screeching halt, after a flurry of US data suggested the world’s largest economy is holding up far better than expected, which means interest rates will have to rise further and take far longer to decline.
“Until recently, the market debate was all about soft-landing or hard-landing, recession or no recession. However, the real world is now not playing ball, prompting investors to come up with the idea of ‘no-landing’ at all,” Kingswood chief economist Rupert Thompson said.
“This new concept of ‘no-landing’ is not really that helpful, not least because, as any airline pilot will testify, there is ultimately either a soft or hard landing. Arguably, the day of reckoning has just been postponed until the second half of the year with any US recession now looking more likely to occur then, if one occurs at all,” he said.
Having dismissed warnings from US policymakers that inflation is too high and too persistent for comfort, investors are starting to accept they may have been overly optimistic in their assumptions.
Peak-a-boo
Money markets show investors expect US rates to peak at around 5.3 per cent by July, with a quarter-point rate cut possibly materialising by December.
This marks a massive shift from expectations at the start of February for a peak below 5 per cent by July and the first rate cut coming in just weeks later.
“It might be premature to believe that recession is off the table now, when Fed will have done 500bp+ of tightening in a year, and the impact of monetary policy tended to be felt with a lag on the real economy, of as much as 1-2 years,” JPMorgan head of global and European equity strategy Mislav Matejka said.
“The damage has been done, and the fallout is likely still ahead of us,” he said.
S&P 500 and Nasdaq futures fell 0.2-0.3 per cent. The S&P touched a two-week low on Friday.
“It’s the most aggressive Fed tightening in decades and US retail sales are at all-time highs; unemployment at 43-year lows; payrolls up over 500k in January and CPI/PPI inflation reaccelerating,” analysts at BofA noted. “That’s a Fed mission very much unaccomplished.”
The release on Wednesday of the minutes of the Fed’s latest meeting may offer more insight into policymakers’ deliberations, but could have less impact than usual because the meeting took place after January’s bumper payrolls and retail sales reports.
In addition, the Fed’s preferred measure of inflation, the core personal consumption expenditures index (PCE), lands on Friday. It is expected to haven risen by 0.4 per cent in January, the biggest gain in five months, while the annual pace is forecast to have slowed to 4.3 per cent.
The dollar nudged lower against a basket of major currencies, but was noticeably down against so-called commodity currencies, including the Australian dollar, which rose 0.5 per cent and the Canadian dollar, which gained 0.1 per cent.
Brent crude futures, which last week shed nearly 4 per cent, rose 0.9 per cent to US$83.74 a barrel, while copper CMCU3 gained 1.7 per cent to trade around US$9,143 a tonne. Both are highly sensitive to the health of the Chinese economy, which is resuming more normal activity after three years of Covid lockdowns.
China’s offshore yuan rose 0.1 per cent to around 6.865 to the dollar after Beijing kept interest rates steady as expected, having poured liquidity into the banking system in recent days.
The earnings season continues this week with major retailers Walmart and Home Depot set to offer updates on the health of the consumer. — Reuters
