Stocks Rebound as Fed Calms Inflation Worries

Asian markets rebounded on Friday led by Japanese shares, building on Wall Street investors buying stocks that would benefit most from an economic revival.

Federal Reserve officials’ inflation fears were calmed towards the weekend, reassuring the markets that price pressures from the reopening of the economy would prove transitory. This interrupted a global three-day retreat for stocks. 

According to Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, U.S. equities were up, so there is a bit of relief in Asia.

However, they certainly are going to have some volatility near term, he said. As markets react to CPI and other economic indicators for clues on the path for U.S. monetary policy, he added. 

He said that the U.S. central bank might open the discussion on tapering its asset purchases as soon as the policy meeting next month.

On Wednesday, data showed that annual U.S. consumer prices unexpectedly gained the most in over a decade. This prompted markets to bet on earlier policy tightening, and stock markets started tumbling.

However, the reassurance from Fed officials about the transitory nature of inflation has for now stalled the equities sell-off.

Governor Christopher Waller, one of Fed speakers overnight, signaled that rates wouldn’t rise. That’s until policymakers either see inflation to be above target for a long time or very high inflation.

Stocks on The Move

In Japan, Tokyo’s Nikkei jumped 2.2% in stock market trade. In comparison, the MSCI’s broadest index of Asia-Pacific shares outside Japan inched up 0.8%. 

The blue chips of China added 1.7%, while Australia’s benchmark rallied 0.8%.

In a note to clients, Chris Weston, head of research at broker Pepperstone in Melbourne, wrote, it seems that inflation matters less today than yesterday. He said the buy-the-dip crowd was out in force, suggesting that recent selling was a pullback within a bull market. 

When the market reopens, S&P 500 futures will likely further gain 0.4% after a 1.2% rally in the index on Thursday. The Dow Jones Industrial Average ended the day with a 1.3% gain. Moreover, the Nasdaq Composite edged up 0.7%.

Shares in small-cap companies, chipmakers, and transportation providers led the rally. These businesses stand to gain as the U.S. comes out from the recession caused by the coronavirus pandemic.

Benchmark 10-year Treasury yields fell by nearly 4 basis points overnight. In Asian trading, they have also eased further to 1.6539%. Wednesday’s CPI print was the biggest daily rise in two months. These yields had spiked 7 basis points afterward.