Stocks shrug off inflation angst, yen bows to dollar

LONDON: World shares and the dollar inched higher and gold was at a three-month low on Thursday as traders' attention continued to swing between the battle to lower inflation and speculation about currency market intervention in China and Japan.

Europe's regional STOXX 600 index barely budged in early trading after what had been its biggest rise in almost a month the previous day, while futures markets were pointing to a fractionally higher start on Wall Street later. Sweden had already kicked the day off with another interest rate hike, while one of its biggest firms and one of Europe's largest fashion retailers H&M saw its shares hit a 16-month high after forecast-beating results.

It all tied in with the multi-trillion dollar question economists are struggling with. Where is stubbornly high inflation heading? Spain reported its annual inflation rate had dropped to 1.9% in June, its lowest since March 2021. Equivalent numbers from Europe's biggest economy, Germany, are due out too while the world’s top central bankers were decamping from an ECB-hosted get-together near Lisbon.

"We are entering a delicate phase for monetary policy given the lags," S&P's Global Chief Economist Paul Gruenwald said as the firm predicted a further rise in default rates in many parts of the world. "If inflation remains sticky, rates will need to go higher. But if central banks have overtightened, growth will slow sharply."

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan had fallen 0.5% with holidays in Singapore, India and Malaysia making for thinner trading. Chinese blue chips fell 0.3% and Hong Kong's Hang Seng index slumped 1.3%. Japan's Nikkei, however, gave up earlier gains to be up 0.1%

Most of the focus remained on the region's two biggest currencies, Japan's yen and China's yuan, which have both been under intense pressure in recent weeks. The yuan eased to 7.2491 per dollar, just a whisker away from its eight-month trough hit a day ago. That was despite another stronger-than-expected official rate from the People's Bank of China, which investors read as Beijing trying to steady the yuan.

Japan's yen, meanwhile, touched a more than seven-month low versus the dollar. The dollar's surge of more than 11% against the yen since late March has seen it reach 144.71 yen and prompted increased warnings from Japanese government officials this week about the speed of the move. The Bank of Japan intervened in the currency market last autumn when the dollar strengthened beyond 145 yen. It was at 144.24 in European trading.

"The playbook of verbal intervention is consistent with intervention happening soon and if it gets above 145 we could quite easily get to see them intervene again," said ING global head of markets Chris Turner. Shane Oliver, chief economist at AMP in Sydney said though that China might not mind its currency falling a bit further because it helps support its giant export sector

"But they probably don't want it to fall too rapidly because then it looks a bit like a panic," he added. GERMAN ANGST

Overnight, U.S. share markets had ended broadly flat although the high-flying Nasdaq had managed another small gain as Apple closed at a fresh record high. Federal Reserve Chair Jerome Powell had said in Portugal that U.S. interest rates are likely to rise further and did not rule out a July hike. Notably, he said he did not see inflation abating to the 2% target until 2025.

In the bond markets, European yields - a proxy for borrowing costs - were inching up again. In contrast to Spain's data, news that Nordrhein-Westfalen's inflation rate had ticked up again bolstered expectations for something similar from the German-wide figure later given that NW is the country's most populous state.

Germany's 10 year bond yield, the benchmark for the currency bloc, was 4.5 basis points (bps) higher at 2.36%, while the two-year yield was up 4 bps at 3.21%. Two-year U.S. Treasury yields were up at 4.759% too although still below the 4.778% that had touched on Wednesday after Powell comments.

Futures see about an 80% chance the Fed will raise interest rates by 25 basis points in July, before holding rates steady for the remainder of the year. European Central Bank President Christine Lagarde, on the other hand, further cemented expectations for a ninth consecutive rise in euro zone rates in July. Markets have all but priced in two more rate hikes from the ECB this year.

By contrast, Bank of Japan (BOJ) Governor Kazuo Ueda reiterated that "there's still some distance to go" in sustainably achieving 2% inflation, the conditions the BOJ has set for considering an exit from ultra-easy stimulus. Investors are now awaiting the U.S. PCE index on Friday, the Fed's favoured inflation gauge. Analysts polled by Reuters expect the core rate to be 4.7% on a year-over-year basis, still well above the Fed's 2% target.

"Markets seem stuck in a holding pattern, watching in awe the inconsistencies between risk sentiment, yield curves, data surprises and inflation," said Mark McCormick, global head of FX and EM Strategy at TD Securities.