Stocks gain ahead of US inflation data

Stocks posted mostly modest gains as investors awaited US inflation data that will help clarify the path for Federal Reserve policy. 

Europe’s Stoxx 600 index rose 0.4%, off its highs of the session and US equity futures also pared earlier gains. A gauge of Asian stocks, meanwhile, rallied more than 1% as Japanese equities hit a fresh three-decade high. Treasuries climbed, while the dollar weakened against most of its Group-of-10 peers. 

The US inflation report is top of mind for traders Thursday. More evidence of cooling price pressures will support optimism around expectations for Fed interest-rate cuts, but a hot reading could spur volatility. Economists tracked by Bloomberg expect year-over-year core inflation to fall to 3.8% in the December data from 4% in the prior month.

“Confirmation that prices are easing will boost confidence that a May cut can be expected, and that could prompt some rally in stocks and bonds,” said Stuart Cole, chief macro economist at Equiti Capital in London. “But you need to be cognizant of the underlying CPI component. If services prices are still going in the wrong direction, then this could potentially stall any rally.”

Cryptocurrency stocks extended gains in US pre-market trading after the Securities and Exchange Commission for the first time approved exchange-traded funds that invest directly in bitcoin. The largest cryptocurrency briefly scaled $47,000 in a muted climb after the green light. Bitcoin had already jumped over 160% in the past 12 months in anticipation of the ETFs as well as looser monetary policy. 

In Asia, benchmark Japanese indexes notched fresh three-decade highs, thanks in part to the yen’s recent weakness. Strategists also said a newly introduced tax-free retirement savings program may help attract more domestic inflows to the market.

“The recent rally shows that overall, both domestic individual investors and foreign investors have been forced to change their attitude toward Japanese stocks to a more positive one,” said Ikuo Mitsui, fund manager at Aizawa Securities Co. “There is also a sense that investors who were late to the market are buying to follow the rise in the index.”

Investors are gearing up for a bout of turbulence in Treasuries when the US consumer price data are published later. Bond traders have trimmed bets on gains for Treasuries this month, and the swaps market shows a lower chance of expected Fed cuts by March relative to pricing late last year. 

Fed Bank of New York President John Williams said Fed officials need to see more signs of cooling in the economy before reducing rates, but noted current policy levels are adequate to bring inflation back to the central bank’s target. The tone of comments differed from those he made on Dec. 15, when he said the near-term question was whether policy was “sufficiently restrictive” to ensure inflation comes back to 2%. At the time, he also added that officials “aren’t really talking about rate cuts.”

JPMorgan Asset Management, however, says the Fed may end up cutting interest rates more than it’s currently signaling as the US economy slows, driving a rally in shorter-maturity Treasuries.

Oil added to gains as tensions in the Middle East persisted, while gold also advanced.

Key events this week:

• US CPI, initial jobless claims, Thursday
• China CPI, PPI, trade, Friday
• UK industrial production, Friday
• US PPI, Friday
• Some of the biggest US banks report fourth-quarter results, Friday
• Minneapolis Fed President Neel Kashkari speaks, Friday
• ECB chief economist Philip Lane speaks, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 rose 0.4% as of 9:53 a.m. London time
• S&P 500 futures rose 0.2%
• Nasdaq 100 futures rose 0.4%
• Futures on the Dow Jones Industrial Average rose 0.1%
• The MSCI Asia Pacific Index rose 1.1%
• The MSCI Emerging Markets Index rose 0.6%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0965
• The Japanese yen rose 0.2% to 145.48 per dollar
• The offshore yuan rose 0.2% to 7.1716 per dollar
• The British pound was unchanged at $1.2742

Cryptocurrencies

• Bitcoin rose 0.7% to $46,259.76
• Ether rose 3.3% to $2,610.3

Bonds

• The yield on 10-year Treasuries declined four basis points to 3.99%
• Germany’s 10-year yield was little changed at 2.21%
• Britain’s 10-year yield declined three basis points to 3.78%

Commodities

• Brent crude rose 1.5% to $77.96 a barrel
• Spot gold rose 0.4% to $2,032.45 an ounce

This story was produced with the assistance of Bloomberg Automation.