US inflation expectations boost stocks ahead of data

The dollar weakened, stocks rose and Treasury yields dipped on expectations slowing U.S. inflation will erode the case for more rate hikes.

A gauge of the greenback dropped to the lowest since April as traders focus on U.S. consumer price data due later Wednesday, with a Bloomberg survey showing expectations for both core and headline inflation continuing to moderate in the face of the Federal Reserve’s monetary policy onslaught.

The Stoxx Europe 600 index advanced for a fourth day. Nordic Semiconductor ASA jumped more than 5% after an earnings beat, leading the tech sector higher. Bank shares outperformed, with Virgin Money UK Plc surging as much as 6.5% after the UK’s eight largest lenders all passed the Bank of England’s latest stress test. Travel and leisure shares fell, led by Air France-KLM and IAG after Deutsche Bank cut its recommendations on the stocks.

Futures on the S&P 500 and Nasdaq 100 edged higher after Tuesday’s solid gains.

A trend of slowing inflation in the U.S. could be pivotal for policymakers in the months ahead, according to Bloomberg Economics. Officials have warned in recent weeks that higher rates will be needed to ensure price growth slows to the Fed’s 2% target, and a 25-basis-point increase is all but penciled for July 26 after the pause in June. The policy path after that remains an open question.

“Both U.S. and European equity markets have decoupled from the inflation narrative in recent months and this makes sense given the well-behaved decline in US inflation, which should continue with the June release today,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “However, an upside surprise in core inflation could catch investors off guard and lead to more softness in markets.”

Across Asia, shares were a mixed bag, with declines in Japan and increases in Australia and India. Hong Kong stocks rose after data showed a strong credit expansion in the world’s second-largest economy. Chinese tech firms gained for a third day as unusual praise from the nation’s top economic planner stoked optimism over policy support for the sector.

In contrast to the gains in Hong Kong, China’s domestic benchmark CSI 300 index shed 0.4%, an indication that local investors would like to see stronger stimulus to salvage an ailing economy.

Also in the spotlight is the yen’s advancement beyond the key 140 level partly on speculation that the Bank of Japan will tweak policy later this month.

Elsewhere, the offshore yuan gained for a fifth day against the greenback, after China’s central bank extended support for the currency via a stronger-than-expected daily reference exchange rate.

In commodities, oil steadied Wednesday after rising amid indications that Russian crude production is dropping, signaling the market’s supply glut may be coming to an end. Iron ore and industrial metals rose amid optimism that fresh liquidity is bolstering China’s construction sector. Gold was steady.

Key events this week:

• Canada rate decision, Wednesday
• Bank of England Governor Andrew Bailey speaks, Wednesday
• US CPI, Wednesday
• Federal Reserve issues Beige Book, Wednesday
• Fed speakers include Neel Kashkari, Loretta Mester, Raphael Bostic, Wednesday
• China trade, Thursday
• Eurozone industrial production, Thursday
• US initial jobless claims, PPI, Thursday
• US University of Michigan consumer sentiment, Friday
• US banks kick off earnings, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 rose 0.8% as of 10:18 a.m. London time
• S&P 500 futures rose 0.2%
• Nasdaq 100 futures rose 0.2%
• Futures on the Dow Jones Industrial Average rose 0.1%
• The MSCI Asia Pacific Index rose 0.5%
• The MSCI Emerging Markets Index rose 0.7%

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%
• The euro rose 0.1% to $1.1021
• The Japanese yen rose 0.5% to 139.70 per dollar
• The offshore yuan rose 0.2% to 7.1954 per dollar
• The British pound was little changed at $1.2924

Cryptocurrencies

• Bitcoin rose 0.5% to $30,724.63
• Ether rose 0.8% to $1,889.35

Bonds

• The yield on 10-year Treasuries declined three basis points to 3.94%
• Germany’s 10-year yield was little changed at 2.65%
• Britain’s 10-year yield declined six basis points to 4.60%

Commodities

• Brent crude rose 0.4% to $79.73 a barrel
• Spot gold rose 0.1% to $1,934.94 an ounce

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