Shares steady, dollar dips as US holiday lifts rates gloom

© Reuters. FILE PHOTO: A man looks at electric monitors displaying Japan's 10-year government bond yield on gilts and the exchange rate between the Japanese yen against the U.S. dollar outside a brokerage in Tokyo, Japan January 18, 2023. REUTERS/Issei Kato

By Amanda Cooper

LONDON (Reuters) -Global shares inched up on Monday as a U.S. holiday tempered volatility ahead of minutes of the latest Federal Reserve meeting even though data on core inflation has raised the risk of interest rates heading higher for longer.

The dollar, which is this month on track for its largest one-month rise since September, eased a touch, reflecting a retreat in risk aversion among investors.

With U.S. markets shut for the Presidents' Day holiday, non-U.S. assets got some respite from the relentless pressure of last week.

The MSCI All-World index rose 0.2%, helped by modest gains in Europe, where the STOXX 600 rose 0.1%, as gains in mining shares offset a decline in the tech sector.

A surge higher in both stock and bond prices in the first six weeks of the year came to a screeching halt, after a flurry of U.S. data suggested the world's largest economy is holding up far better than expected, which means interest rates will have to rise further and take far longer to decline.

"Until recently, the market debate was all about soft-landing or hard-landing, recession or no recession. However, the real world is now not playing ball, prompting investors to come up with the idea of ‘no-landing’ at all," Kingswood chief economist Rupert Thompson said.

"This new concept of ‘no-landing’ is not really that helpful, not least because, as any airline pilot will testify, there is ultimately either a soft or hard landing. Arguably, the day of reckoning has just been postponed until the second half of the year with any U.S. recession now looking more likely to occur then, if one occurs at all," he said.

Having dismissed warnings from U.S. policymakers that inflation is too high and too persistent for comfort, investors are starting to accept they may have been overly optimistic in their assumptions.

PEAK-A-BOO

Money markets show investors expect U.S. rates to peak at around 5.3% by July, with a quarter-point rate cut possibly materialising by December.

This marks a massive shift from expectations at the start of February for a peak below 5% by July and the first rate cut coming in just weeks later.

"It might be premature to believe that recession is off the table now, when Fed will have done 500bp+ of tightening in a year, and the impact of monetary policy tended to be felt with a lag on the real economy, of as much as 1-2 years," JPMorgan (NYSE:JPM) head of global and European equity strategy Mislav Matejka said.

"The damage has been done, and the fallout is likely still ahead of us," he said.

S&P 500 and Nasdaq futures fell 0.2-0.3%. The S&P touched a two-week low on Friday.

"It's the most aggressive Fed tightening in decades and U.S. retail sales are at all-time highs; unemployment at 43-year lows; payrolls up over 500k in January and CPI/PPI inflation reaccelerating," analysts at BofA noted. "That's a Fed mission very much unaccomplished."

The release on Wednesday of the minutes of the Fed's latest meeting may offer more insight into policymakers' deliberations, but could have less impact than usual because the meeting took place after January's bumper payrolls and retail sales reports.

In addition, the Fed's preferred measure of inflation, the core personal consumption expenditures index (PCE), lands on Friday. It is expected to haven risen by 0.4% in January, the biggest gain in five months, while the annual pace is forecast to have slowed to 4.3%.

The dollar nudged lower against a basket of major currencies, but was noticeably down against so-called commodity currencies, including the Australian dollar, which rose 0.5% and the Canadian dollar, which gained 0.1%.

Brent crude futures, which last week shed nearly 4%, rose 0.9% to $83.74 a barrel, while copper gained 1.7% to trade around $9,143 a tonne. Both are highly sensitive to the health of the Chinese economy, which is resuming more normal activity after three years of COVID lockdowns.

China's offshore yuan rose 0.1% to around 6.865 to the dollar after Beijing kept interest rates steady as expected, having poured liquidity into the banking system in recent days.

The earnings season continues this week with major retailers Walmart (NYSE:WMT) and Home Depot (NYSE:HD) set to offer updates on the health of the consumer.