Stocks rally as Fed rate hopes dent dollar

By Herbert Lash and Huw Jones

NEW YORK/LONDON (Reuters) – Global stocks rose on Friday for a second day on hopes that signs U.S. inflation is cooling means less aggressive interest rate hikes from the Federal Reserve, an outlook that has the dollar facing its biggest two-day drop in almost 14 years.

Oil prices jumped after health authorities in top global crude importer China eased some of the country’s heavy COVID curbs, raising hopes for improved economic activity and demand in the world’s top crude importer.

In another sign that the Fed would be less hawkish about hiking rates going forward due to the better-than-expected report on U.S. consumer prices, gold prices rose to a near three-month high and headed to their best week since July 2020.

On Wall Street, stocks mostly rose to add to the prior day’s biggest daily percentage gains for the S&P 500 and Nasdaq in more 2-1/2 years.

“We got a potential view that the Fed may not need to get as horrible as we thought over the last couple of weeks,” Marvin Loh, senior global macro strategist at State Street in Boston, said about the market’s exuberance. “Risk could be stabilizing here.”

The Fed has no choice but to press on, but if inflation is no longer rising that indicates the end of further tightening may be near, Loh said.

The Dow Jones Industrial Average fell 0.45%, but the S&P 500 gained 0.40% and the Nasdaq Composite added 1.22%.

MSCI’s all-country stock index rose 1.53%, lifting it to its highest levels since mid-September, as the market re-priced expectations for the Fed’s target rate to peak below 5%, or about 20 basis points lower than recent highs.

Fed policymakers on Thursday signaled a more gradual approach to hiking rates, but made clear that rates may still end up higher for longer than most thought just a couple months ago to tame 40-year high inflation.

Market bets that the Fed will raise rates by 50 basis points at its next meeting in December, instead of 75 basis points, increased.

“It’s more of a sigh of relief after a cacophony of bad news over the past month or so. While the data may be improving in the U.S., it’s certainly not the case in Europe,” said Mike Hewson, chief markets analyst at CMC Markets.

In Europe, euro zone yields firmed and the EU’s executive European Commission said it sees a bigger euro zone slowdown in 2023, though only slightly affecting jobs or public finances.

Britain’s economy shrank in the three months to September at the start of what is likely to be a lengthy recession.

John O’Toole, global head of multi-asset investment solutions at asset manager Amundi, said the reaction in stock markets to the U.S. inflation data showed investors were “pretty desperate” for good news and could be getting ahead of themselves.

“Even if we’re closer to the end than we are to the beginning of a tightening cycle, that doesn’t mean that rates are not going to stay at an elevated level for an extended period of time, and that’s something that financial markets just don’t have in their outlook,” O’Toole said.

The weaker outlook for corporate earnings and jobs has yet to be fully priced into markets, he added.

GRAPHIC: US inflation, Fed rates and markets

Investors poured into risky assets after the U.S. data, with the dollar down 1.295%%.

The yield on benchmark U.S. 10-year paper slipped below 4% on Thursday. U.S. bond markets are closed on Friday for Veterans Day.

Asian shares scaled a seven-week high, with MSCI’s broadest index of Asia-Pacific shares outside Japan set for its biggest one-day percentage jump since March 2020.

In China, health authorities on Friday eased the country’s heavy COVID-19 curbs, including shortening by two days the quarantine times for close contacts of cases and inbound travelers. The country’s blue-chip CSI 300 index rose 2.8% and the Hang Seng Index surged 7.7%.

Oil prices rose after the U.S. inflation data but were on track for weekly declines of more than 4% due to COVID-related worries in China. [O/R]

U.S. crude rose 3.45% to $89.45 per barrel and Brent was at $96.31, up 2.82% on the day.

Elsewhere, the crypto world remained gripped by the outlook for the crypto exchange FTX. Regulators froze some assets of FTX and industry peers raced to limit losses on Friday as solvency problems worsened.

The firm was scrambling to raise about $9.4 billion from investors and rivals, Reuters reported. FTX’s native token FTT was down 20.8% at $2.952, having fallen 90% month-to-date. Bitcoin fell 4.15% to $16,822.

(Reporting by Herbert Lash, additional reporting by Huw Jones in London; Editing by Edwina Gibbs, Barbara Lewis; Susan Fenton and Andrea Ricci)