Stocks storm to fresh records on easing inflation

Equities cheer inflation data 

Shares on Wall Street ended the month at all-time highs on Thursday and are set to maintain the buoyant mood in March as a summer rate cut in the US looks more certain following a decline in the Fed’s preferred inflation gauge and some encouraging commentary from Fed officials.

The all-important core PCE price index eased slightly from 2.9% to 2.8% y/y in January, while the headline PCE figure fell to 2.4%. An acceleration in services inflation, which pushed up the month-on-month rate to 0.4% didn’t seem to faze investors. A sharp slowdown in consumer spending during the month and a slight pickup in weekly jobless claims probably offset any concerns about sticky services inflation.

Fed still pencilling in cuts 

However, what likely reinforced the optimism in equity markets is the unified message from the Fed that whilst there is no urgency to cut rates right now, looser policy will likely be necessary later in the year. Yesterday’s remarks from Williams, Goolsbee, Daly, Mester and Bostic suggest that policymakers are all on the same page when it comes to the interest rate outlook and that three rate cuts remains the baseline scenario.

More Fed speakers will take to the podium later today, including Governor Waller. But if there’s anything that can spoil the positive tone, it’s more likely to be the ISM manufacturing PMI that’s also coming up, as its prices paid component is forecast to have edged up for the second straight month.

US futures were last trading in positive territory following record closes for the S&P 500 and Nasdaq 100 on Thursday. The broader Nasdaq Composite index finally managed to notch up a new record close too – its first since November 2021. Germany’s Dax index and the Nikkei 225 in Tokyo were also in record territory today.

Dollar bounces back in choppy trade, euro steadies on CPI surprise 

The US dollar initially fell after the PCE inflation numbers but soon reversed higher to finish up on the day. Month end flows possibly contributed to the choppy trading in the FX market on Thursday, but investors might also have had second thoughts on bearish bets against the greenback. Preliminary CPI estimates out of France and Germany yesterday pointed to easing inflationary pressures in February, while earlier in the week, the Reserve Bank of New Zealand seemingly ruled out further hikes in a dovish tilt.

However, the euro received a double boost on Friday from upward revisions to the February manufacturing PMIs as well as hotter-than-expected Eurozone flash inflation figures.

The euro area’s manufacturing PMI was revised up from 46.1 to 46.5, indicating a lesser contraction than previously thought. More importantly, inflation across the bloc fell less than expected in February to 2.6% from 2.8%, beating forecasts of 2.5%. An underlying measure of CPI also came in above expectations, denting hopes of an early rate cut.

The ECB meets next week for its March policy meeting and may refrain from signalling a rate cut soon following the CPI data.

The euro was last trading slightly firmer just above the $1.08 mark.

Yen gives up gains, oil climbs 

The Australian dollar was also higher versus its US counterpart despite some mixed PMI readings out of China, while the yen was the worst performer on Friday.

Bank of Japan Governor Kazuo Ueda dismissed the idea that the central bank was within reach of its 2% inflation goal, countering comments made yesterday from board member Takata. Ueda maintained his stance that much will depend on the outcome of this year’s spring wage negotiations.

Hence, a rate hike is still possible but far from guaranteed. The yen slid on Ueda’s remarks overnight, reversing the prior day’s gains, with the dollar recovering back above 150 yen.

In commodities, oil futures gained more than 1% on reports that OPEC+ will likely extend the voluntary production cuts by at least another three months when they meet next week.