Wall Street, Asian stocks jump as slower US Inflation curbs Fed rate hike bets; Treasury yields drop

Stocks extended a rally Thursday following softer-than-expected US inflation data, which stoked speculation that the Federal Reserve could pivot to a shallower pace of interest-rate hikes. Shares added about 1% in Australia and South Korea, while Hong Kong futures were up a similar amount. US and European contracts were in the green after the S&P 500 hit a three-month high and the technology-heavy Nasdaq 100 pulled 20% above a June low. The dollar held losses in the wake of the optimism in the US session, which saw a greenback gauge retreat the most since the onset of the pandemic.

Short-term Treasury yields dropped Wednesday as investors scaled back expectations of how aggressively the Fed will have to tighten monetary policy. There’s no cash Treasuries trading in Asia on Thursday due to a Japan holiday. Crude oil held most of a jump above $91 a barrel, while Bitcoin broke past $24,000 in a sign of the brighter spirits in markets.

US headline inflation was 8.5% in July, down from the 9.1% June advance that was the largest in four decades. That’s still high and Fed officials were quick to stress more rate hikes are coming. They also signaled investors should rethink expectations of cuts next year to shore up economic growth. The question is whether the rebound in global equities and other riskier investments from this year’s rout can continue against that backdrop.

“We still need to see a couple more monthly decreases in underlying inflation before the FOMC can start to think about pausing its tightening cycle,” Carol Kong, strategist at Commonwealth Bank of Australia Ltd., said on Bloomberg Television. “The market is still currently underestimating US inflation and how sticky it will be over the medium term.”

Fed-Speak

Minneapolis Fed President Neel Kashkari said he wants the Fed’s benchmark interest rate at 3.9% by the end of this year and at 4.4% by the end of 2023. Alluding to market pricing of the Fed’s policy path, Kashkari said it was not realistic to conclude that the Fed will start cutting rates early next year, when inflation is very likely to be well in excess of the 2% goal. Chicago counterpart Charles Evans said inflation remains “unacceptably high” and that “we will be increasing rates the rest of this year and into next year.”

Financial Conditions

“The easing of financial conditions likely annoys the Fed, and we should not be surprised to see Fed speakers continue to try to talk down the market and risk assets,” said Christian Hoffmann, portfolio manager at Thornburg Investment Management. Swaps referencing the Fed’s September meeting brought a half-point rate increase back into play as opposed to a bigger move. A key portion of the Treasury yield curve remains deeply inverted, a pattern widely thought to signal the risk of a recession. Meanwhile in China, the central bank said it will safeguard the economy against inflation threats, pledging to avoid massive stimulus and excessive money printing to spur growth.

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What to watch this week:

– US PPI, initial jobless claims, Thursday– San Francisco Fed President Mary Daly is interviewed on Bloomberg Television, Thursday– Euro-area industrial production, Friday– US University of Michigan consumer sentiment, Friday– Some of the main moves in markets:

Stocks– S&P 500 futures rose 0.2% as of 9:50 a.m. in Tokyo. The S&P 500 rose 2.1%– Nasdaq 100 futures increased 0.3%. The Nasdaq 100 rose 2.9%– Australia’s S&P/ASX 200 index jumped 0.8%– South Korea’s Kospi index added 1.4%– Hang Seng Index futures advanced 1.1% earlier

Currencies– The Bloomberg Dollar Spot Index was steady– The euro was at $1.0301– The Japanese yen was at 132.84 per dollar– The offshore yuan was at 6.7301 per dollar, down 0.1%

Bonds– The yield on 10-year Treasuries was little changed at 2.78% on Wednesday

Commodities– West Texas Intermediate crude was at $91.57 a barrel, down 0.4%– Gold was at $1,790.82 an ounce, down 0.1%