Asian shares saw a general increase on Friday following a mixed close on Wall Street. Tokyo’s benchmark continued its strong start to the year, trading well above 35,000 and reaching its highest level since 1990. U.S. futures remained largely unchanged while oil prices experienced a surge.
Despite concerns raised by a U.S. inflation report that caused some investors to postpone anticipated interest rate cuts by the Federal Reserve, Asian markets showed resilience.
Tokyo’s Nikkei 225 (JP:NIK) gained 1.1% during the trading session. The Hang Seng (HK:HSI) in Hong Kong edged 0.1% higher, and the Shanghai Composite index (CN:SHCOMP) advanced by 0.4%.
Conversely, South Korea’s Kospi (KR:180721) slipped 0.1%, and Australia’s S&P/ASX 200 (AU:XJO) also experienced a marginal decline of 0.1%.
In Taiwan (TW:Y9999), shares rose on the eve of a presidential election.
Yesterday, Wall Street experienced some instability as the inflation update prompted uncertainty regarding the timing of interest rate cuts, which investors are eagerly anticipating.
The S&P 500 (SPX) slipped 0.1% to 4,780.24. The Dow Jones Industrial Average (DJIA) barely rose by less than 0.1% to 37,711.02, while the Nasdaq composite (COMP) saw a marginal increase of less than 0.1% to 14,970.19.
Investors had been buoyed by the expectation that a decrease in inflation would encourage significant interest rate cuts by the Federal Reserve in 2024. This, in turn, would increase investment prices to their advantage. However, Thursday’s morning inflation report revealed that U.S. consumers faced higher prices, with a 3.4% increase overall in December compared to the previous year. This acceleration from November’s 3.1% inflation rate exceeded economists’ predictions by a small margin.
The Impact of Inflation Data on Treasury Yields and Stock Indexes
While the recent inflation data may not have been entirely alarming, there are some underlying trends that offer a more positive outlook. By excluding food and fuel prices, which tend to fluctuate greatly month to month, the increase in prices from November to December aligned closely with economists’ expectations.
The release of this inflation data had a significant impact on Treasury yields, causing them to experience a volatile run in the bond market. Initially, yields dropped from Wednesday night into Thursday. However, immediately after the report’s release, traders adjusted their bets for the timing of the first rate cuts and yields began to rise again, albeit inconsistently. By late afternoon, the yields had once again lowered, aiding stock indexes in recovering much of their earlier losses.
The yield on the 10-year Treasury declined to 3.97%, compared to its late Wednesday rate of 4.04%. This reduction follows a broader trend that has seen yields decrease from over 5% in October.
Bank of America economists remain steadfast in their prediction that the Federal Reserve will begin cutting rates in March, despite the inflation data surpassing expectations. They believe that certain factors contributing to recent strength, such as used car prices, will soon diminish in the coming months. This outlook was shared in a report from BofA Global Research.
A surge in oil prices exerted upward pressure on inflation and yields, allowing them to recover from substantial losses earlier in the week.
At the start of Friday, benchmark U.S. crude oil was valued at $73.68 per barrel, experiencing a significant 2.4% increase ($1.66 jump) since the previous day when it traded at $72.02 per barrel. International standard Brent crude also saw gains, rising by $1.28 to reach $78.01 per barrel.
In currency trading, the U.S. dollar weakened against the Japanese yen, with the exchange rate dropping from 145.74 yen to 145.13 yen.