A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Wednesday, July 28, 2021. (Photo: Michael Nagle/Bloomberg) Benchmarks rose across the region, from Australia to South Korea and Hong Kong. Japanese shares gained on a weaker yen that helps exporters.
Treasury yields steadied after those on the 10-year note rose to the highest since November, a whisker away from the psychologically important 4.5% level. Traders’ conviction on three quarter-point rate cuts from the Federal Reserve this year is quickly dissipating, with markets now favoring just two reductions.
The dollar was little changed.
“We are seeing more interesting hints of cyclicality and value tilt in the global equity market environment in the past few weeks, and such an environment tends to be favorable to Asian equity markets in general,” said Homin Lee, senior macro strategist at Lombard Odier. “We will see if the US CPI report for March tomorrow will change this dynamic.”
The yen remained near this year’s low of 151.97 per dollar, and 152 — a key level that many say will trigger Japanese authorities to act.
Elsewhere, oil traded near a five-month high as investors weighed simmering tensions in the Middle East and persistent supply concerns.
West Texas Intermediate traded below $87 a barrel after closing lower Monday for the first time in seven sessions. Israeli officials said progress has been made in negotiations for a ceasefire in Gaza, signalling a potential easing of hostilities, but Hamas denied the claim.
Sticky inflation
Economists surveyed by Bloomberg forecast Wednesday’s consumer price index will show some easing of inflation pressures. Yet the core gauge, which excludes food and energy costs, would be up 3.7% from a year earlier — above the Fed’s 2% target.
“After Monday’s solar eclipse, US core inflation will determine if the shadow that markets increasingly price over a June rate cut will grow larger or pass by,” said Morgan Stanley strategists including Matthew Hornbach.
With some Fed members questioning the wisdom of cutting rates if inflation remains in a “sticky” holding pattern, this week’s inflation figures may have a lot riding on them, according to Chris Larkin at E*Trade from Morgan Stanley.
“While the Fed was hesitant to read too much into back-to-back months of higher-than-expected inflation data, a third month may lead them to change their tune,” he said.
Swap contracts imply around 60 basis points of US monetary easing this year, which means two cuts is the most likely outcome with the first expected by September, according to Bloomberg pricing. On Friday, the chance of a third cut was still above 50%.
“The recent resiliency of inflation reduces the immediacy of rate cuts, which puts more pressure on earnings to drive future market gains,” said Richard Saperstein at Treasury Partners. “Given the elevated market multiples and rising bond yields, we remain cautious on stocks until earnings season delivers clear evidence of earnings growth.”
In other commodities, gold held a record high, up more than 17% since mid-February.