(Bloomberg) -- Stocks and currencies in developing economies advanced Tuesday after the latest US data fueled wagers that the Federal Reserve will start lowering interest rates as early as next month.
The MSCI Inc. gauge for emerging currencies jumped to session highs after US producer prices rose by less than forecast in July, sending US yields lower. The Indonesian rupiah, the Philippine peso and the Polish zloty registered the biggest appreciations in a basket of peers, as of 12:00 p.m. New York time.
“Caution is needed because volatility does not seem to cease,” said Juan Perez, director of trading at Monex USA. “The PPI gave us at least a clue that inflationary pressures are certainly easing.”
On Tuesday, a key index for EM stocks also advanced for a third session, trading at the highest intraday since Aug. 2. In debt markets, Dominican Republic bonds maturing in 2060 were up as much as 1.4 cents on the dollar, according to indicative pricing data collected by Bloomberg.
Investors will now shift their focus to the consumer inflation report on Wednesday for further signals about the path for Fed easing. In the wake of last week’s market turmoil, traders will scour the releases for extra clues on whether policymakers have room to secure a soft landing for the economy.
The print “will undoubtedly generate higher FX volatility,” Francesco Pesole, an FX strategist at ING Bank NV in London, wrote in a note. “We are generally optimistic that data will fall in line with consensus expectations and continue to endorse market pricing for 100 basis points of Fed cuts by year-end.”
Meanwhile, geopolitical tensions have increased after the US said an Iranian attack on Israel could be imminent. Fitch Ratings downgraded Israel’s sovereign debt by one notch, to A from A+, while keeping a negative outlook, as the continued military conflict weighs on the country’s public finances.
