Markets pare back inflation expectations

·4-min read

Global stocks and benchmark US bonds are heading for their first weekly gain in a month, with economic growth worries tempered by a view that sliding copper and other commodity prices could brake runaway inflation.

The week has been marked by steep declines for commodities on concern that the world economy is looking shaky and that interest rate hikes will hurt growth - which in turn is prompting traders to cut inflation expectations and pare back some bets on the size of the hikes.

"Inflation will remain elevated and above target but it's increasingly likely it will start to peak over the next few months," said Andrew Hardy, investment manager at Momentum Global Investment Management.

"Markets could take that reasonably well - there's potential for recovery later in the year."

Copper, a bellwether for economic output with its wide range of industrial and construction uses, is heading for its steepest weekly drop since March 2020. It fell in London and Shanghai on Friday and is down more than 7 per cent on the week.

Tin dropped 9.7 per cent to $24,380 a tonne, its lowest since March 2021 and on track for a weekly percentage fall of nearly 22 per cent, its biggest on record.

Brent crude futures are down over 3 per cent on the week to $109.70 a barrel and off 10 per cent for the month, while benchmark grain prices sank, with Chicago wheat off more than 8 per cent for the week.

Gold was up 0.29 per cent at $1,828.50 per ounce but was heading for a second straight weekly fall.

The drops have offered some relief to equities since energy and food have been the drivers of inflation. After heavy recent losses, MSCI's World equities index was up 0.3 per cent on the day and 2.4 per cent this week, setting it up for the first weekly gain since May.

US S&P futures rose 0.7 per cent after Wall Street's main indexes posted solid gains on Thursday.

European stocks rose 0.82 per cent, on course to post small weekly gains. Britain's FTSE rose 0.73 per cent, also showing a small uptick on the week.

"While market worries about an abrupt slowdown are the culprit behind recent moves lower in raw materials prices, lower commodity prices do feel like they could be just what the doctor ordered for the global economy," said NatWest markets strategist Brian Daingerfield.

"So much of our hard-landing fears relate to concerns that link back to commodity prices."

The Federal Reserve's commitment to reining in 40-year-high inflation is "unconditional," US central bank chief Jerome Powell told lawmakers on Thursday, while acknowledging that sharply higher interest rates may push up unemployment.

Germany is heading for a gas shortage if Russian gas supplies remain as low as they are now due to the Ukraine conflict, and certain industries would have to be shut down if there is not enough come winter, Economy Minister Robert Habeck told Der Spiegel magazine on Friday.

German business morale fell more than expected in June.

Bonds rallied hard on hopes that bets on aggressive rate hikes would have to be curtailed, with German two-year yields sliding 26 basis points on Thursday in their biggest drop since 2008.

The German 10-year yield was down 4 bps on Friday after slumping 29 bps on Thursday, and was heading for its first weekly drop since mid-May.

The benchmark 10-year Treasury yield was steady at 3.0666 per cent after falling 7 bps on Thursday and

Bond funds suffered their largest outflows since April 2020 in the week to Wednesday while equities lost $16.8 billion as markets were stuck in maximum bearish mode, BofA's weekly analysis of flows showed on Friday.

The US dollar has slipped from last week's 20-year highs. It was steady at $1.0529 per euro and dropped 0.2 per cent to 134.67 yen.

The battered yen has steadied this week and drew a little support on Friday from Japanese inflation topping the Bank of Japan's 2 per cent target for a second straight month, putting more pressure on its ultra-easy policy stance.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.1 per cent, helped by short sellers bailing out of Alibaba - which rose nearly 6 per cent - amid hints that China's technology crackdown is abating.

Japan's Nikkei rose 1.2 per cent for a 2 per cent weekly gain.

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