© Reuters. FILE PHOTO: People walk past an electronic screen displaying Japan’s Nikkei stock index in Tokyo, Japan, June 14, 2022. REUTERS/Issei Kato
LONDON (Reuters) – Global stocks rose on Monday despite Beijing denying it would consider easing its zero COVID-19 policy, which diverted investor flows to the U.S. dollar ahead of the likely release of key consumer inflation data this week.
Risk assets rallied on Friday on speculation that China was preparing to ease restrictions on the pandemic, but health officials over the weekend reiterated their commitment to a “dynamic clearance” approach should new coronavirus cases emerge.
“We can question whether there is any truth to the China story, but the market is happy to believe it at the moment, despite a lot of denial,” said Jeremy Stretch, head of G10 currency strategy at CIBC Capital Markets.
The dollar was under pressure for a second day as traders seized on the idea that China could ease some restrictions after the government said on Monday it would make it easier for people to get in and out of the capital.
The dollar fell against other major currencies, pushing the pound up 0.8% to $1.1457 and the euro up 0.2% to near par at $0.9980.
and Nasdaq futures edged higher, up 0.2% and 0.3%, respectively.
The biggest macroeconomic risk event this week will be the US consumer price index (CPI) for October, which could affect investors’ expectations for the likely direction of the Fed’s monetary policy.
Federal Reserve Chairman Jerome Powell last week dispelled speculation that the central bank might slow the pace of interest rate hikes, saying rates could remain elevated for longer.
On Friday, the October jobs report showed faster-than-expected jobs growth, but slowing wage growth and a rise in the unemployment rate suggested some labor market tensions may be easing.
The median forecast on Thursday was for annual inflation to slow to 8.0% and core inflation to edge down to 6.5%.
“If we can see a slowdown in core CPI, I think that might be a little hint of that, but I think if we do see that, it will encourage that correction to go further,” said CIBC’s Stretch.
Speculation that China, the world’s top consumer of goods, could open its economy rose 7 percent on Friday, the biggest one-day gain since 2009, while oil prices rose more than 4 percent.[MET/L] [O/R]
Four Fed policymakers said on Friday they would consider a small rate hike at their next policy meeting, sounding less hawkish than Chairman Jerome Powell.
At least seven Fed officials are scheduled to speak this week, which should help improve the rate outlook, with markets now slightly leaning toward a half-point hike to 4.25-4.5% next month.
“I don’t think the market will do much before the U.S. inflation data,” said Massimiliano Maxia, senior fixed income specialist at Allianz (ETR:) Global Investors.
“The market is pricing in a 50 basis point rate hike in December and a quarter point hike early next year, but they are prepared to change their view soon if consumer price data unexpectedly rises,” he added.
The two-year Treasury yield, the most sensitive to inflation and interest rate expectations, was last up 6 basis points on the day at 4.711%, down from Friday’s 2007 peak.
Also worth noting is Tuesday’s US midterm elections, where Republicans could win control of one or both chambers and lead to an impasse on fiscal policy.
Meanwhile, oil prices retreated, giving back some of last week’s gains. It fell 0.7% to $97.96 a barrel, and also fell to $91.91 a barrel.