Global stocks rose on Thursday, powered by a rally in technology shares that pushed Japan’s Nikkei to a new 34-year high, while the dollar steadied around three-month peaks as investors assessed the chances of when US rates might fall.
A warmer reading of US inflation earlier this week prompted traders to cut the chances of a prompt rate cut from the Federal Reserve, which lifted the dollar and sparked a sell-off in the fixed income market.
However, with other measures of economic activity pointing to resilient U.S. growth, analysts say investors are banking increasingly on a soft landing - a gradual slowing in growth and inflation that does not result in recession.
Stocks particularly have got a boost this week and on Thursday were fired up by another scorching rally in big U.S. tech shares, which tend to be more sensitive to the growth outlook, that spread to other markets.
The MSCI All-World index .MIWD00000PUS, which is trading around two-year highs, was up 0.27%, while in Europe, the STOXX 600 .STOXX benchmark rose 0.6%, lifted by strong semiconductor stocks and auto shares after results from carmakers Renault RENA.PA and Stellantis STLAM.MI.
The dollar =USD was holding around its highest in three months, buoyed by the fact that investors are banking on far fewer rate cuts this year than they were just weeks ago.
"The market is assessing the probabilities here around the rate outlook - probably a soft landing where growth is acceptable and inflation continues to converge towards 2%, I think, remains the market's base-case scenario, and our base case too," Samy Chaar, chief economist at Lombard Odier, said.
"What has totally shifted is the fact that the inflation risk has collapsed, but the risk of some form of decent growth that is leading to sticky inflation has increased and therefore pricing for cuts has come down," he said.
Optimism about the growth outlook sent Wall Street stocks higher overnight, as chipmaker Nvidia NVDA.O overtook Apple AAPL.O as the third-largest U.S. company by market value.
AI BOOM
Enthusiasm for all things AI also pushed Taiwan stocks .TWII to a record high on Thursday, with chipmaker TSMC 2330.TW up nearly 8%.
Japan's Nikkei .N225 closed 1.2% higher, climbing as high as 38,188.74 during the session, the most since January 1990, inching closer towards the record high set in December 1989.
Traders are now pricing in an 82% chance of a Fed cut in June, the CME FedWatch tool showed. Markets at the end of 2023 had priced in rate cuts starting as early as March.
Investors now anticipate 97 basis points of cuts in the year, closer to the 75 bps the Fed had forecast in December. FEDWATCH
US retail sales numbers later on could offer some insight into how consumer spending held up in January.
Central bankers everywhere will be a little less keen on cutting rates if the Fed delays, said Ben Bennett, APAC investment strategist at Legal & General Investment Management.
"But it's only one inflation print, and we all know how hard it is to forecast inflation, so the market impact is probably relatively small unless we get a second high print in a row."
Chicago Fed President Austan Goolsbee said on Wednesday the Fed should be wary of waiting too long before it cuts rates.
That sent Treasury yields lower, with the yield on 10-year Treasury notes US10YT=RR down 4 basis points to 4.224%.
Separate data releases on Thursday showed the economies of Japan and the United Kingdom slipped into recession. The Japanese yen JPY=EBS strengthened marginally but was still around its weakest since November. The dollar was down 0.3% on the day at 150.04 yen.
The 150 level has been seen in the past as a potential catalyst for intervention by Japanese monetary authorities. It was just past this level that led them to intervene to shore up the yen in late 2022.
