Shares sobered by Fed warning, China acts on property

SYDNEY/LONDON – Share markets continued last week’s rally in more modest fashion on Monday after a top U.S. central banker warned investors against getting carried away over one inflation number, while Chinese stocks gained on aid for the country’s property sector.

A modest miss on U.S. inflation was enough to see two-year Treasury yields dive 33 basis points for the week and the dollar lose almost 4 percent – the fourth biggest weekly decline since the era of free-floating exchange rates began over 50 years ago.

However, the resulting easing in U.S. financial conditions was not entirely welcomed by the Federal Reserve, with Governor Christopher Waller saying on Sunday it would take a string of soft reports for the bank to take its foot off the brakes.

Waller added the markets were well ahead of themselves on just one inflation print, though he did concede the Fed could now start thinking about hiking at a slower pace.

Futures are wagering heavily on a half-point rate rise to 4.25-4.5 percent in December, and then a couple of quarter-point moves to a peak in the 4.75-5 percent range.

Two-year yields edged down to 4.39 percent, after diving as deep as 4.29 percent on Friday.

“The CPI downside surprise aligns with a broad range of indicators pointing to a downshift in global inflation that should encourage a moderation in the pace of monetary policy tightening at the Fed and elsewhere,” said Bruce Kasman, head of economic research at JPMorgan.

“This positive message needs be tempered by the recognition that downshift in inflation will be too little for central banks to declare mission-accomplished, and more tightening is likely on the way.”

The benchmark European STOXX index rose 0.37 percent, and MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.73 percent, after jumping 7.7 percent last week.

U.S. markets looked set to open lower, with S&P E-mini futures down 0.26 percent.

Eyes on China

Dealers were also waiting to see if Chinese stocks could extend their big rally amid reports regulators have asked financial institutions to extend more support to stressed property developers.

China’s real estate index jumped 3.5 percent in response. Blue chips rose 1 percent, helped by a slew of changes to China’s COVID curbs, even as the country reported more cases over the weekend.

“It’s hard to see how the case news is anything but negative from an economic standpoint, but it’s the symbolism of the movement, however small, in the zero COVID strategy that markets are happily latching onto,” said Ray Attrill, head of FX strategy at NAB.

The support for China’s property sector, which consumes a vast amount of metals, boosted copper towards a five-month high. Three-month copper on the London Metal Exchange (LME) rose 0.3% at $8,519 a ton by 0725 GMT.

U.S. President Joe Biden will meet Chinese leader Xi Jinping in person on Monday for the first time since taking office, with U.S. concerns over Taiwan, Russia’s war in Ukraine and North Korea’s nuclear ambitions on top of his agenda.

The news on COVID rules had stoked a short-covering bounce in the yuan, which added to broad pressure on the dollar as yields dived. The yuan was set 1.4 percent firmer on Monday – the largest such move since 2005.

The dollar index moved down a fraction on Monday at 106.69, still well short of last week’s 111.280 top.

The euro eased a touch to $1.0308, after climbing 3.9 percent last week, while the dollar firmed to 139.56 yen following last week’s 5.4 percent drubbing.

The dollar lost almost as much to the Swiss franc, steered in part by warnings from the Swiss National Bank that it would use rates and currency purchases to tame inflation.

Sterling eased back to $1.1755 ahead of the British Chancellor’s Autumn Statement on Thursday, where he is expected to set out tax rises and spending cuts.

Crypto currencies remained under pressure as at least $1 billion of customer funds were reported to have vanished from collapsed crypto exchange FTX.

Bitcoin recovered 2.9 percent at $16,785, having shed almost 22 percent last week.

Oil prices pared earlier gains and fell on Monday, after hopes of a boost in China demand were offset by the firmer U.S. dollar. Brent crude futures were down 32 cents, or 0.3 percent, to $95.67 a barrel by 0725 GMT after settling up 1.1 percent on Friday.