World stock markets rose on Thursday ahead of key U.S. inflation data and amid widespread excitement in the crypto world after the United States approved the first exchange-traded funds (ETFs) to track bitcoin.
MSCI's top world index was up 0.3% (.MIWD00000PUS) as London (.FTSE), Paris (.FCHI), and Frankfurt (.GDAXI) all swept higher, and after Tokyo's Nikkei (.N225) breached the 35,000 point barrier for the first time since 1990 overnight in Asia.
The exuberant mood looked likely to continue on Wall Street, where E-mini futures for the S&P 500 were up 0.3% and all the main volatility and fear gauges (.VIX) were pointing down.
Market attention has zeroed in on the upcoming U.S. consumer price index report (CPI) for December. Core CPI is forecast to remain unchanged at 0.3% from the month before, while year-on-year inflation is expected to slow to 3.8% from November's 4%, a Reuters poll showed.
"The risk is that markets sell off on a strong print," said Ben Bennett, APAC investment strategist for Legal and General Investment Management (LGIM). "The reaction could be more muted if we get a soft number."
U.S. Treasury yields, which are driving global borrowing costs at the moment, were hovering just under 4% in Europe.
Germany's equivalent 10-year yield briefly hit its highest in almost a month early on in Europe after some hawkish comments from European Central Bank member Isabel Schnabel on Wednesday, but then reversed to settle at 2.19%.
Since the start of the year, investors have been rethinking just how sharply and early the Fed and others will cut interest rates. Fed futures prices indicate traders anticipate 140 basis points (bps) of easing this year, compared with 160 bps of cuts expected at the end of 2023.
Still, it is higher compared to the Fed's projection of 75 bps of cuts in the year. Markets are pricing in a 69% chance of a rate cut as soon as in March, the CME FedWatch tool showed.
Federal Reserve Bank of New York President John Williams said on Wednesday it was too soon to call for rate cuts as the central bank still had some distance to go on getting inflation back to its 2% target.
LGIM's Bennett said investors were underestimating the risk of a U.S. recession. "Soft CPI prints could eventually become a sign of disappointing demand. But that's probably still a while away."
