US inflation cheer gives stocks best week this year

Asian equities are on course Friday to round off their best week this year on a high, after the latest sign that U.S. inflation is slowing cemented hopes that Federal Reserve rate hikes are almost over and triggered a strong rally across world markets.

Investors cheered the smallest increase in U.S. factory gate inflation in nearly three years, a day after figures showed U.S. consumer price inflation slowed for a 12th month in a row to its lowest annual rate in more than two years.

Although the lagged impact of 500 basis points of Fed rate hikes since March last year has yet to be fully felt, the 'soft landing' optimism sweeping markets right now is driving the dollar lower and asset prices higher.

Bullish sentiment is such that the Asian economic indicators on Friday - Singapore GDP, Japanese industrial production and Indian wholesale price inflation - may have no bearing on markets even if they disappoint.

Together, the fall in the dollar's value and U.S. bond yields is a potent loosening of financial conditions for global markets, particularly emerging markets.

MSCI's World stock index jumped more than 1 per cent on Thursday to its highest since April last year. The S&P 500 and Nasdaq also hit fresh 15-month highs, and the MSCI Asia ex-Japan index jumped more than 2 per cent.

The broadest index of Asia and Pacific shares is now up 5 per cent this week, firmly on course for its best week since November. Curiously, that's the extent of its year-to-date gains, underlining how much it has trailed leading U.S., European and Japanese bourses, in some cases by a considerable distance.

That has largely been down to a heavy drag from China, which has not had its troubles to seek - sluggish growth, deflation and a 'doom loop' tying together a depreciating exchange rate and widespread selling across its financial markets.

The latest economic signals from China on Thursday did little to lift the gloom. Exports slumped 12.4 per cent in June, their steepest decline in three years, and imports fell 6.8 per cent - both more than the month before and more than analysts had expected.

But Chinese shares rallied more than 1 per cent, boosted by another signal from Beijing that its tech sector crackdown is over. Premier Li Qiang met leading tech firms on Thursday and urged them to do more to support the economy.

Meanwhile, top-level dialogue between Chinese and U.S. officials continues over a range of issues, including trade, which may dial down geopolitical risk a notch or two.

Here are key developments that could provide more direction to markets on Friday:

- Singapore GDP (Q2)

- Japan industrial production (May)

- India WPI inflation (June)