Equities steady, dollar dips as US holiday season lifts dismal rates

LONDON, Feb. 20 (Reuters) – Global stocks rose on Monday as a US holiday tempered volatility ahead of the latest Federal Reserve meeting, though data on core inflation has raised the risk that interest rates will rise for longer .

The dollar, which is on track for its biggest one-month gain since September this month, eased slightly on the back of a reduction in investor risk aversion.

With US markets closed for the Presidents Day holiday, non-US assets took a break from last week’s relentless pressure.

The MSCI All-World index (.MIWD00000PUS) was up 0.2%, aided by modest gains in Europe, where the STOXX 600 (.STOXX) rose 0.1% as gains in mining stocks offset a decline in the technology sector.

A surge in both stock and bond prices in the first six weeks of the year came to an abrupt halt after a flurry of US data suggested the world’s largest economy is holding up much better than expected, meaning interest rates will have to rise farther and takes much longer to subside.

“Until recently, the market debate has been about soft-landing or hard-landing, recession or no recession. However, the real world isn’t playing ball now, leading investors to come up with the idea of ​​’no-landing,'” said chief economist Rupert Thompson of Kingswood.

“This new concept of ‘no-landing’ isn’t really helpful, not least because, as any airline pilot will testify, eventually there is a soft or hard landing. Judgment Day has probably just been postponed until the second half of the year with a recession in the US now looking more likely, if at all,” he said.

After dismissing warnings from US policymakers that inflation is too high and too persistent for comfort, investors are beginning to accept that they may have been too optimistic in their assumptions.

PEAK-A-BOO

Money markets show that investors expect US interest rates to peak at around 5.3% in July, with a rate cut of a quarter point possible in December.

This marks a huge shift from early February expectations for a peak below 5% in July and the first rate cut comes just weeks later.

It may be premature to believe that the recession is now off the table, as the Fed will have tightened more than 500 basis points in a year, and the impact of monetary policy has tended to be felt with a lag in real terms. economy, of as much as 1-2 years,” said Mislav Matejka, head of global and European equity strategy at JPMorgan.

“The damage has been done and the consequences are probably still ahead of us,” he said.

S&P 500 and Nasdaq futures fell 0.2-0.3%. The S&P hit a two-week low on Friday.

It’s the most aggressive Fed tightening in decades and US retail sales are at record highs, unemployment is at a 43-year low, payrolls are up more than 500,000 in January and CPI/PPI inflation is picking up. up again,” analysts from BofA noted. “That’s a Fed mission that’s far from over.”

Wednesday’s release of the minutes of the Fed’s latest meeting may provide more insight into policymakers’ deliberations, but could have less of an impact than usual as the meeting came after January’s huge payrolls and retail sales reports.

In addition, the Fed’s favorite measure of inflation, the core personal consumption expenditure (PCE) index, lands on Friday. It is expected to be up 0.4% in January, its biggest gain in five months, while its year-over-year pace is expected to slow to 4.3%.

The dollar fell lower against a basket of major currencies, but fell noticeably against so-called commodity currencies, including the Australian dollar, which rose 0.5% and the Canadian dollar, which gained 0.1%.

Brent oil futures, which lost nearly 4% last week, rose 0.9% to $83.74 a barrel, while copper gained 1.7% to trade around $9,143 a ton. Both are highly sensitive to the health of China’s economy, which is resuming more normal activity after three years of COVID lockdowns.

China’s offshore yuan rose 0.1% to around $6,865 after Beijing kept interest rates stable as expected after pumping liquidity into the banking system in recent days.

Earnings season continues this week with major retailers Walmart (WMT.N) and Home Depot (HD.N) offering consumer health updates.

Additional reporting by Wayne Cole in Sydney; Adapted by Shri Navaratnam, Christian Schmollinger, Philippa Fletcher, Christina Fincher and Barbara Lewis

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