Thursday 21:00 GMT
What you need to know
- US equity indices reverse opening losses, Vix index back below 20
- January core inflation stronger than expected, retail sales disappoint
- 10-year Treasury yield hovers near four-year high above 2.9%
- Dollar suffers sharp swings, hits 15-month low versus yen
- Gold at 3-week high above $1,350 an ounce
US equities continued to claw back recent losses, with the main indices rising for a fourth successive day, as participants digested US data releases that showed consumer price inflation rising more than forecast but retail sales falling short of expectations.
The resilient showing by stocks came as the Cboe Vix volatility index fell below its long-term average of 20, while US Treasuries sold off, pushing the yield on the 10-year note to a four-year high above 2.9 per cent.
The dollar, however, reversed a post-data rally and extended this week’s decline, hitting a 15-month low against the yen. Gold touched its highest point for nearly three weeks.
The “core” US CPI, which excludes volatile food and energy prices, rose 0.3 per cent in December, keeping the year-on-year rate at 1.8 per cent, compared with expectations for a dip to 1.7 per cent.
The data added to concerns, sparked by US figures this month showing wage pressures intensifying, that the Federal Reserve might raise interest rates this year more aggressively than had been expected.
Meanwhile, headline retail sales contracted 0.3 per cent last month, while the ex-autos reading was unchanged.
“While CPI gains were the focus, the poor retail sales results have added an additional complexity of at least questioning the strength of the consumer entering 2018,” said Marvin Loh, senior global market strategist at BNY Mellon.
“In combination, rising prices and lower demand is possibly the most troublesome combination for still richly valued equity assets by certain historical measures.”
Alexander Lin, US economist at Bank of America Merrill Lynch, said the mix of data would be a recipe for a cautious Fed.
“However, other indicators point to continued momentum in the real economy, contrasting with the retail sales figures. A combination of persistent gains in inflation and stronger growth would turn the Fed more hawkish,” he said.
“We think the Fed is still assessing the data as well as financial conditions, leaving us to hold with our call for three [rate] hikes this year, with risks skewed to four.”
Wall Street overcame an early bout of nerves, and the S&P 500 rose 1.3 per cent to 2,698, leaving it “just” 6.1 per cent down from January’s record high. At one stage last week, the index was down nearly 12 per cent from its peak.
Tech stocks including Facebook, Amazon and Netflix spearheaded the day’s advance, with the Nasdaq Composite index rising 1.8 per cent. The Dow Jones Industrial Average rose 1 per cent.
The Cboe Vix index of implied equity volatility, which briefly spiked above 50 last week, was down 23 per cent in late trade at 19.21 as the near-term Vix future expired and was settled.
European stocks put in similarly bullish performances, with the Stoxx 600 index rising 1.1 per cent and the FTSE 100 gaining 0.6 per cent.
Hong Kong’s Hang Seng registered its biggest one-day gain since May 2016, up 2.7 per cent, ahead of the Lunar New Year break which will leave it closed from Thursday afternoon until Tuesday next week. Mainland China’s CSI 300, tracking Shanghai and Shenzhen-listed stocks, rose 0.8 per cent.
South Korea’s Kospi Composite index rose 1.1 per cent, while Tokyo’s Topix shed 0.8 per cent, hit by the stronger yen.
Fixed income and forex
US bond markets were spooked by the US inflation data, with the 10-year Treasury yield up 7 basis points at a fresh four-year high of 2.91 per cent. The two-year yield was also up 7bp at 2.17 per cent.
The dollar saw choppy trading in the aftermath of the day’s data releases. The dollar index, a measure of the US currency against a weighted basket of peers, rose as high as 90.12 before going into reverse and trading at 89.05, down 0.7 per cent on the day.
The dollar/yen cross once again caught the eye as it fell to a 15-month low of ¥106.73. It subsequently pulled back to ¥106.98, still down 0.8 per cent on the day. The euro was up 0.8 per cent at $1.2453, while sterling was 0.8 per cent higher at $1.4001.
Gold was up a hefty $22, or 1.7 per cent, at $1,352 an ounce, the highest level since January 26, as the dollar’s weakness helped offset inflation concerns.
Oil prices were higher after data from the Energy Information Administration showed crude stocks rising by less than expected last week. Brent settled at $64.36 a barrel, up 2.6 per cent, but still down nearly 10 per cent from a three-year high above $71 hit in late January.
Additional reporting by Michael Hunter in London and Edward White in Taipei
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