Hope for smaller rate rises to lift Wall Street, oil gains

By Huw Jones and Sujata Rao

LONDON (Reuters) - Wall Street headed for another day of gains on Thursday as investors banked on peaking inflation persuading central banks to dial back on their anticipated interest rate hikes in September.

The prospect of less aggressive tightening in borrowing costs sent the dollar lower, while oil prices rallied after the International Energy Agency raised its oil demand growth forecast for this year.

Figures on Wednesday showed that U.S. consumer prices (CPI)were unchanged in July compared with June, a two-year rise in inflation stopped in its tracks by a drop in gasoline prices.

The S&P 500 futures and Nasdaq futures were up about 0.35%.

Before Wall Street's opening bell, however, investors will scrutinise U.S. producer prices data for further clues on inflation, along with the latest jobless claims numbers.

"For the first time in long time we had a bit of good news so markets may extend this rally," said Grace Peters, EMEA head of investment strategy at JPMorgan (NYSE:JPM) Private Bank.

"We agree with the direction of travel, but if you dig into the CPI data you can see in the details that inflation is broad and pretty sticky and will come down only slowly from here," she said.

This means the Fed may step down the pace of rate hikes from 75 basis points to 50 basis points, Peters said.

In Europe, the STOXX index of 600 leading companies was up flat. The MSCI all country index slightly firmer, though it remains down about 14% for the year, wiping out most of 2021's 17% advance.

The World Federation of Exchanges said $18 trillion has been wiped off global markets in the first half of 2022, a 15% drop in stock market capitalisation, as the global economy tries to recover from COVID-19 and deal with fallout from war in Ukraine.

GRAPHIC: Fed funds futures (https://fingfx.thomsonreuters.com/gfx/mkt/zdpxozxwovx/Pasted%20image%201660211524270.png)

The dollar lost further ground against other major currencies, down 0.238% as traders reined in bets of aggressive rate hikes.

"We think a Fed doing battle with higher core inflation will keep the dollar supported on dips - especially against the euro and yen," ING said in a note.

GRAPHIC: Dollar (https://fingfx.thomsonreuters.com/gfx/mkt/movangqompa/Pasted%20image%201660205365612.png)

PPI NEXT STOP

Overnight on Wall Street, the S&P 500 rose more than 2%, while the Nasdaq Composite added 2.9%. The Nasdaq has now gained more than 20% from its June low.

"Rising real yields, due to the Fed's commitment to fighting inflation, have been an enormous problem for valuations in 2022, so any dovishness is seen as positive by the stock market, particularly for the highest valued companies," said Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors.

"However, the potentially more dovish outlook undermined a key support for the U.S. dollar."

U.S. policymakers left no doubt they would continue to tighten monetary policy until price pressures were fully broken.

San Francisco Fed President Mary Daly, in an interview with the Financial Times, warned it is far too early for the U.S. central bank to declare victory in its fight against inflation and a half-percentage point rate rise in September was her baseline.

Yields on U.S. Treasuries were slightly weaker at 2.7698%.

Brent crude futures gained 0.8% to $98.19 a barrel, while U.S. West Texas Intermediate crude futures advanced 0.9% to $92.70.

Spot gold was flat at $1,792 per ounce.[GOL/]

MSCI's broadest index of Asia-Pacific shares outside Japan surged 1.4% to the highest in six weeks, buoyed by a 1.8% jump in Hong Kong, a 1.2% advance in South Korean shares and a 1.5% gain in China's blue chips.