© Reuters. FILE PHOTO: People pass an electronic screen displaying Japan’s Nikkei stock price index in a conference hall in Tokyo, Japan June 14, 2022. REUTERS/Issei Kato
By Marc Jones
LONDON (Reuters) – World equities stabilized at a two-year low and the Japanese yen stalled around 1998 levels on Thursday as investors braced for US inflation data likely to determine the size of the Federal Reserve’s next rate hike .
Global markets have had a rough couple of weeks, but there was a brief hiatus () ahead of US consumer prices as Europe’s key stock markets and Wall Street futures [.N] both stabilized in the red after six days.
The seemingly unstoppable dollar also took a breather, as UK markets jumped on a report discussing the UK government’s move to scrap more of the tax cuts announced last month.
It came just a day before the Bank of England was to end its emergency measures to stabilize the gold market [GB/] and helped both European stocks and Wall Street futures reverse after falling 4% and 5% respectively over the past 5 days.
Markets are increasingly concerned that rapidly rising interest rates will lead to a recession. Data confirmed that German harmonized inflation stood at 10.9% y/y in September and close to 10% in Sweden, but all eyes are on US consumer price inflation expected at 1230 GMT.
Paul O’Connor, head of Multi-Asset at Janus Henderson Investors, said the question investors have is whether central banks like the Fed are nearing the end of their rate hikes.
“Are we there yet? I feel like we’re close to pricing in peak rates, but given the growth story, I think there’s probably a lot more downgrades to come,” he said.
It takes a year to 18 months for interest rate hikes to take full effect. As a result, “it is quite likely that around the end of the year, central banks will declare a pause … labor markets will cool down and housing markets will fall.”
The headline figure of the US CPI is expected to have fallen two tenths of a percentage point to a still blue, 8.1%, but the ‘core’ figure that takes out the more volatile components is expected to rise again from 6.3% to 6.5%.
The minutes of the Fed’s latest policy meeting released Wednesday showed that many officials “the cost of taking too little action to curb inflation probably outweighed the cost of taking too much action.”
However, several policymakers stressed that it would be important to “calibrate” the pace of further rate hikes to reduce the risk of “significant negative effects” on the economy.
Government bond yields were choppy in Europe. The yield of the US 10-year benchmark initially rose to 3.923%, but then fell back to 3.894%, with most comparable European yields also declining slightly.
Markets estimate a 90% chance of another 75 basis point rate hike by the Fed in November, versus a 10% chance of a half-point hike.
WORRIED
In Asia, widespread stock market weakness was down 0.6% and South Korea’s Kospi fell 1.8% as news that Taiwanese chip maker TSMC saw demand slump and cut its investment budget by at least 10%. in the wider region.
Hong Kong fell 1.9% and mainland Chinese blue chips lost 0.3% to leave the MSCI index of Asia-Pacific stocks close to its 2 1/2 year low.
However, US emini stock futures offered some hope, rising 0.5% after Wednesday’s sixth consecutive decline.
“The risk of a run-down and mishap in the financial markets is greater than I can remember,” said Tom Nash, fixed income portfolio manager at UBS Asset Management in Sydney.
HEROIC
The , which measures the dollar against six major rivals, fell to 112.92 for the CPI data.
The US currency remained close to a new 24-year high against the yen, last switching hands at 146.79, while sterling rose nearly 1.5% to $1.1263 on reports of possible changes in the tax cut. It had hit a two-week low of $1.0925 on Tuesday.
The 10-year government bond yield, which broke after the UK government announced tax cuts last month, had risen from a new 14-year high of 4.632% to 4.249% in early afternoon trading.
The Bank of England has insisted that its emergency bond market support end on Friday, as originally announced, and is refuting media reports of continued aid if needed.
BoE governor Andrew Bailey had rocked the markets on Tuesday by saying that British pension funds and other investors hard-hit by a fall in bond prices had until that deadline to fix their problems.
“I’d say it’s heroic to say the risk of some system problem has been extinguished because these are big steps and we don’t know how much deleveraging needs to be done,” said O’Connor of Janus Henderson. “Markets still feel very dysfunctional”.
Meanwhile, markets recovered after dropping 2% on Wednesday amid demand concerns.
futures were up 23 cents, or 0.25%, to $92.69 a barrel, while US West Texas Intermediate crude rose 21 cents, or 0.2%, to $87.44 a barrel. [O/R]
Last week, the producer group, made up of the Organization of the Oil Exporting Countries (OPEC) and allies, including Russia, pushed up prices when it agreed to cut supplies by 2 million barrels per day (bpd).
