By Samuel Indyk
LONDON (Reuters) – Wall Street futures were higher and the dollar lower on Thursday after U.S. consumer price inflation increased only moderately last month, supporting the view that the Federal Reserve is at the end of its rate hike cycle.
The consumer price index (CPI) gained 0.2% in July, the Labor Department said on Wednesday, lifting the annual rate to 3.2% from 3% the month before. Economists polled by Reuters expected headline CPI to rise to 3.3%.
Annual consumer prices have come down from a peak of 9.1% in June 2022. The Fed has a 2% inflation target.
Core CPI, which strips out volatile food and energy prices, increased 4.7% last month after rising 4.8% in June.
Futures on Wall Street extended on gains after the release of the report, as analysts bet that the Federal Reserve might be done with rate hikes.
“Today’s US CPI report may have shown that headline prices increased for the first time in a year, but that was to be expected given the rise in energy prices from their lows last year,” said Madison Faller, Global Investment Strategist at J.P. Morgan Private Bank.
“The key is that core inflation still falling – and there’s ample runway for that to continue. It looks like the Fed is still at or nearing the end of its tightening cycle.”
S&P eminis were last up 0.5%, while European shares also extended their gains.
This helped push MSCI’s main world stocks index higher. It was last up 0.2%.
The foreign exchange market also moved on the news, with the dollar index, which measures the currency against six major peers, extending losses to as low as 101.76, down around 0.6%.
U.S. Treasury yields dropped, with the 10-year yield standing at 3.9858%, down 2.5 bps on the day.
The move spilled over into euro zone bond markets, with Germany’s 10-year yield, the bloc’s benchmark, trimming an earlier rise. It was last at 2.479%.
Money market traders meanwhile firmed bets that the Federal Reserve will keep interest rates unchanged through the rest of the year.
European shares had earlier been higher, boosted by a jump in luxury stocks after China lifted a ban on group tours in the United States and other key markets.
Winners included LVMH, Europe’s largest company by market cap, which rose 2.3%.
France’s CAC 40 – which has a high weighting of luxury names – outperformed in Europe, rising 0.9%, while Germany’s DAX gained 0.5% and Britain’s FTSE 100 was little changed, weighed by a number of large-cap companies going ex-dividend.
CHINA WOES
Asian stocks remained pinned near a two-week low, still reeling from China’s slip into deflation and an announcement of a U.S. ban on investments in China in sensitive technologies like computer chips.
MSCI’s broadest index of Asia-Pacific shares outside Japan was little changed and looked set to log a second straight week of losses. A technology sub-index fell to its lowest in over two months.
Chinese data on Wednesday showed deflation at the consumer-price level and further declines for factory-gate prices in July, exacerbating concerns about the sputtering nature of the post-pandemic recovery.
China is the first G20 economy to report a year-on-year decline in consumer prices since Japan’s last negative headline CPI reading in August 2021.
It highlights “the need for more fiscal support, if Beijing wants to avoid the prospect of a deflationary trap,” said Rodrigo Catril, senior currency strategist at National Australia Bank.
Oil prices were edging lower having earlier hit their highest since November 2022 with support from recent extensions to output cuts by Saudi Arabia and Russia.
U.S. crude was last down 0.5% to $84.01 per barrel and Brent was at $87.30, down 0.3% on the day. [O/R]
Eyes were also on European gas prices after they jumped as much as 35% on Wednesday, hitting their highest level since June 15 after news of possible strikes at Australian liquefied natural gas (LNG) facilities sparked concerns over cargoes moving to Asia.
On Thursday, the front-month Dutch contract was down over 6% to 39.14 euros per megawatt hour, trimming some of the previous day’s gain.
(Reporting by Samuel Indyk and Ankur Banerjee; Editing by Edwina Gibbs, Sam Holmes, Susan Fenton, Alexandra Hudson)
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