Asian Stocks To Mirror U.S. Rally As Inflation Slows

Equities in Asia were set to rally Thursday after US stocks and bonds climbed on slowing inflation data, providing room for the Federal Reserve to cut interest rates.

Futures for Australian and Japanese equities rose. The S&P 500 climbed 1.2% and the Nasdaq 100 advanced 1.5% to place each benchmark at fresh highs. Hong Kong shares will resume trading on Thursday after a holiday.

Australian and New Zealand government bonds rallied Thursday following gains in Treasuries which pushed yields lower across the curve. The US 10-year rate fell 10 basis points, while the policy-sensitive two-year yield dropped nine basis points as investors brought forward interest rate cut expectations. Swaps market pricing had priced in one cut this year, but that jumped to two following the inflation print on Wednesday.

The so-called core CPI — which excludes food and energy costs — climbed 0.3% from March, in line with consensus expectations but snapping a streak of three above-forecast readings which spurred concern that inflation was becoming entrenched. The year-over-year measure cooled to the slowest pace in three years.

“We see the April print as consistent with a direction of travel for inflation dynamics that – in the context of moderation in the real economy – can yield a September cut followed by a second in December,” said Krishna Guha at Evercore.

The Bloomberg dollar index fell to a one-month low as the currency weakened against all of its developed-market peers Wednesday, tracking the decline in yields. The yen extended its rally early Thursday after rising 1% against the greenback in its previous session to the highest level in almost a week.

The latest inflation report may offer US policymakers hope that inflation is resuming its downward trend, which would help pave the way for rate cuts. Separate retail sales data indicated some softening of the resilient consumer demand that’s been bolstering the economy.

“The market likes it,” said Gary Pzegeo at CIBC Private Wealth US. “The news on core inflation was better than expected. Retail sales also showed some deceleration from the previously hot consumer sector. Taken together, this supports a Fed rate-cut in the fall.”

The next CPI figures will be released exactly on the same day when the Fed meets to decide on interest rates — June 12.

Fed Bank of Minneapolis President Neel Kashkari repeated the central bank likely needs to keep rates at the current level for “a while longer,” and questioned how much they’re restraining the US economy.

In corporate news, Boeing Co. faces possible criminal prosecution after the US Justice Department found the company violated a deferred-prosecution agreement tied to two fatal crashes half a decade ago. Walt Disney Co. Chief Executive Officer Bob Iger said marketing expenses at the flagship Disney+ streaming service are too high and will be cut.

Oil edged higher on a bigger-than-expected draw in commercial crude stockpiles. Gold prices also climbed early Thursday, placing the precious metal on pace for its third daily advance. – Bloomberg

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