Shares and bonds ride high after soothing inflation data

Share markets cruised to a fifth straight day of gains on Friday and bonds headed for their best month since 2008, as a dip in the Fed’s favoured inflation gauge and a record monthly drop in euro zone inflation figures brought some end-of-quarter cheer.

An action-packed Q1 was drawing to a close with world stocks up 6 per cent, government debt returning 4-5 per cent, gold 8 per cent higher, oil 8 per cent lower and the dollar barely moved despite some recent banking scares.

Europe’s shares had been lifted 0.5 per cent when euro zone data showed consumer prices there rising 6.9 per cent after an 8.5 per cent increase in February, representing the sharpest deceleration since Eurostat started collecting data in 1991.

Wall Street opened up almost as much after the February US personal consumption expenditures (PCE) price index slowed to 5.0 per cent from 5.3 per cent with the so-called core number, which excludes volatile food and energy, nudging down to 4.6 per cent from 4.7 per cent.

“The brakes are on the economy, but slowly,” said Hans Peterson, the global head of asset allocation at SEB investment management. “So down the road we will have to see what the central banks do.”

A 2.5 per cent rise for the week meant MSCI’s 47-country all world index was heading for its best week since January, while Asian equities had also notched up their first March gain in four years.

That part of the world has been lifted by China casting off its COVID restrictions this year. MSCI Asia ex-Japan has added 3.6 per cent so far following its 12 per cent sprint in the final quarter of 2022.

Japan’s Nikkei also jumped 1 per cent on Friday，as inflation data for the capital Tokyo highlighted broadening price pressures, which in contrast to most other parts of the world is seen as a benefit after decades of deflation.

China and Hong Kong’s Hang Seng rose modestly too after China’s PMI data showed that the recovery in the services sector was gathering pace and manufacturing activity expanded faster than expected.

Investors were still cheered by internet giant Alibaba’s revamp plan which has seen its shares make a whopping 17 per cent this week and been taken as a sign that Beijing’s regulatory crackdown might be over for now.

Fellow Chinese e-commerce firm JD.com Inc jumped 6 per cent on Friday after it announced somewhat similar plans to spin off its property and industrial units.

Central focus

Wall Street’s early rise came after gains for tech stocks but falls in regional bank shares on Thursday after Treasury Secretary Janet Yellen said banking rules needed to be re-examined in the wake of recent turmoil.

Friday’s focus was back on the economy and what the inflation picture means for the Fed, the global economy and the creaky parts of the banking system following this month’s collapse of Silicon Valley bank and emergency takeover of Credit Suisse in Switzerland.

“The underlying source of these (banking market) stresses, which have to do with interest rates, inverted yield curves, etc., is still with us, so these stress factors have not gone away. I suspect we will see bouts of volatility in markets during 2023,” said Herald van der Linde, head of equity strategy for Asia at HSBC.

Fed funds futures are still split on whether the Federal Reserve will hike or not at the next policy meeting in May, while pricing in a rate cut by November. That compared with an overwhelming bet on a 25 basis point hike a month ago before the banking volatility started.

US Treasuries have had a blockbuster month, with the two-year yields down a whopping 70 basis points to 4.110 per cent, the biggest monthly decline since the 2008 financial crash. Ten-year yields are more than 35 bps lower this month to 3.519 per cent, confounding those who had expected the opposite after big rises in February.

“Everyone that was short bonds was trounced,” said Ted Pincus at Switzerland-based hedge fund Mangart Capital, referring to those who had bet on bond yields rising further.

“That’s the problem when you have these kinds of rapid moves.”

Dollar duller

Moves in foreign exchange markets remained muted, but the US dollar was on course for a 2.7 per cent monthly drop against six of its peers, albeit only a 1.1 per cent dip for the quarter.

The euro, which hit a one-week high against the dollar overnight on sticky German inflation data, dipped back under $1.09, still on track for a 3 per cent monthly rise.

Japan’s yen, which has benefitted from safe-haven flows, is headed for a 2.5 per cent gain for the month, while emerging market currencies have mostly risen too.

Oil prices seesawed on Friday, and were down more than 3 per cent for the month and 8 per cent for the quarter. US crude futures were a tad higher on the day at $74.92 per barrel, while Brent crude futures rose to $79.50 per barrel.

Gold hovered near its highest since April last year, up more than 8 per cent for the month to $1,980.20 per ounce.

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