Stock markets rally on renewed US rate cut hopes

HONG KONG, China — Equity markets rallied Monday as a dip in inflation revived hopes the Federal Reserve will cut interest rates this year, while Mumbai was boosted by expectations India’s Prime Minister Narendra Modi would win a third term.

News that the personal consumption expenditures (PCE) index slowed month-on-month to its lowest level since December provided a much-needed boost to investors’ sentiment after a recent pull-back.

Still, the report also showed no change from March on a year-over-year basis, and analysts said the US Fed was unlikely to make its decision based on one batch of data, with decision-makers previously warning they were cautious about cutting too early.

Attention now turns to the Friday release of US jobs data, which will provide the latest snapshot of the world’s top economy. Fed officials have said that an easing of the labor market was crucial for them to feel confident enough to loosen monetary policy.

READ: US Fed’s favored inflation gauge unchanged in April

“We are starting to see some softer data come out” in the United States, Nikko Asset Management’s Naomi Fink told Bloomberg.

“If we can kind of see a gradual disinflation then I think we will probably have a pretty good outcome for global markets.”

UBS Group’s Solita Marcelli added that the “data continue to underpin our base case soft landing scenario”.

“This should allow the US central bank to start policy easing later this year, most likely at its September meeting, in our view,” she said in a note.

The PCE report came after figures showed eurozone inflation topped forecasts in April, though observers were still optimistic the European Central Bank will cut rates this week.

The Dow and S&P 500 ended Friday with healthy gains, though the Nasdaq was flat.

Asian investors in buoyant mood

Asian investors started the week in a buoyant mood, pushing Hong Kong solidly higher thanks to a surge in Chinese tech firms, while Tokyo, Sydney, Seoul, Singapore, Manila, Taipei, and Jakarta were also well up. Shanghai edged down.

Mumbai piled on more than three percent and the rupee advanced as exit polls suggested Modi was on course to win a third successive term with a landslide that commentators said would give him the ability to push through fresh economy-boosting measures.

READ: Weak yen pressures Bank of Japan interest rate decision

London, Paris, and Frankfurt were all in positive territory.

Bets on US interest rates coming down weighed on the dollar against the yen, with the Japanese unit supported by speculation the country’s central bank will lift borrowing costs again, having done so in March for the first time in 17 years.

Oil prices fluctuated after OPEC and other major producers said they would maintain output levels but start unwinding cuts later in the year, even as questions about China’s economic recovery and a spike in US stockpiles cause investors to fret over demand.