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European gains are seen limited after two Fed officials called for an end to the bond-buying program. In Asia, stocks mostly struggled on continuing Delta fears, the dollar was little changed after softening on Wednesday and Treasury yields advanced. In commodities, oil extended gains but gold dipped in a technical correction.
European stocks are likely to extend gains Thursday, with the Stoxx Europe 600 seen continuing its march into record territory. This follows another record-breaking session on Wall Street as investors remained hopeful over infrastructure prospects and cheered the latest inflation data.
However, Europe's advance may be capped after two Federal Reserve officials said it was time for the central bank to start reversing its easy money policies.
Kansas City Fed President Esther George said the central bank has made enough progress toward its objectives of boosting growth and employment to end its $120 billion in monthly purchases of Treasury and mortgage securities. "With the recovery under way, a transition from extraordinary monetary policy accommodation to more neutral settings must follow," Ms. George said in a speech. "Today's tight economy...certainly does not call for a tight monetary policy, but it does signal that the time has come to dial back the settings."
In a separate interview, Dallas Fed President Robert Kaplan argued that the central bank should begin reducing the pace of asset purchases by October. "As long as the economy progresses as I expect, we will meet the...criteria at the September meeting," he said. He said he would support announcing then that the Fed would therefore begin reducing purchases the following month.
The dollar was little changed in Asia after softening Wednesday, with the CPI data assuaging investors that inflation isn't running away, said Commerzbank. The USD Index remained below 93.00.
TD Securities said the dollar's decline was likely triggered by core consumer prices rising by less than expected month-on-month but it doesn't expect the currency's depreciation to last.
Softer core inflation perhaps reduced market bets of U.S. monetary policy normalization, said TD forex strategist Mazen Issa. "While the market may view this as relief on the inflation front, it's not likely to really shift the balance of risk for the USD beyond intra-day noise."
Payrolls data matter more for the Fed's discussions about tapering asset purchases than expected transitory price pressures, he said.
Currencies of commodity exporters will depreciate further against the dollar even though they appear undervalued following this year's rise in commodity prices, said Capital Economics.
"Prices of most commodities have faltered recently and we expect them to decline further over the next few years--primarily due to slower growth in China."
Commodity currencies failed to benefit from higher commodity prices this year but the correlation between the two should re-establish itself, causing commodity currencies to drop as prices fall, said Capital Economics. The currencies will also be hit by higher long-term Treasury yields and country-specific factors such as concerns about fiscal sustainability.
Treasury yields gained in Asia after they mostly lost momentum on Wednesday, with the 10-year closing slightly down. The benchmark snapped a six-day winning streak, ending the session 0.410 percentage point lower than its 52-week high hit in March.
A $41 billion auction in 10-year notes produced a bid-to-cover ratio that was the highest since May 2020, as indirect bidders took down 77.2% of the sale, according to Jefferies economists Thomas Simons and Aneta Markowska. They said the results of that auction were "one for the record books." The auction reversed Wednesday's earlier rise in the 10-year yield, which came after the inflation data.
TD Securities said Treasurys remained the main force driving gilts. "The gravitational pull from Treasuries continues to provide support to gilts, " with the yield on the 10-year gilt trading below the 60 basis-point mark, down from the highs of 90 bps in June, the bank said.
Despite the recent rally, TD expects the 10-year Treasury yield to rise to 1.75% by year end from around 1.370% at present, based on an assumption of continued strong economic momentum in the fourth quarter, a fiscal package totaling $3-$4 trillion and the Fed announcing bond tapering in December. The move would also push the 10-year gilt yield higher, which should reach 85 bps at year-end.
Oil prices were slightly higher in Asian trade, after they closed Wednesday's session more than 1% higher, erasing early losses that came after the White House said it would press OPEC+ to raise output. Pressure abated after EIA data showed declines in U.S. inventories of crude and gasoline.
Goldman Sachs said major Arab Gulf and U.S. producers supplied less-than-expected levels of crude in July, but concerns over Covid-19 flare-ups in crude-importing markets continued to weigh on prices. It estimates global oil demand to decrease to 97.8 million barrels a day in August and September compared with July's 98.4 million b/d.
"Our base case remains that the Delta wave will impact demand--including in China--for only two months," it said, and expects Brent prices to rise to $80 in the fourth quarter.
"The volatility seen in oil markets is likely to be momentary as demand from Western countries is back to pre-pandemic levels and this is weighing in on global oil supplies," said Naeem Aslam, chief market analyst at AvaTrade, in a note.
Gold edged lower in a likely technical correction. The precious metal finished sharply higher Wednesday, marking the first back-to-back advance for the commodity in about a month and the sharpest daily rise in two weeks, after investors parsed a reading on U.S. inflation that mostly matched expectations.
ANZ said the data eased fears the Fed would scale back its monetary stimulus measures and a subsequently weaker dollar also helped to spur investor appetite for gold.
Base metals were mixed, with copper prices up 0.2%, but aluminum and zinc nearly unchanged. All three metals are expected to benefit from increasing adoption of solar energy, said Wood Mackenzie, estimating usage of the metals in the solar-energy sector to double by 2040.
Lower solar-energy equipment production costs should mean it increasingly displaces other energy sources, which "presents a huge opportunity for the base metals sector," said Wood Mackenzie.
Iron ore was lower as China's steel output cuts continued to weigh on demand for the steelmaking material. However, short-term prices shouldn't decline too sharply as the effects of China's steel production cuts appear "tame," according to CBA.
While Beijing's policy goal of leaving full-year steel production unchanged from 2020 remains, the bank said individual steel mills are taking a wait-and-see approach to output cuts. CBA thinks steelmakers could keep production rates steady in the third quarter before reducing output in the fourth.
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