LONDON, Jan 26 (Reuters) - Europe's share markets were heading for their best week of the year so far and oil was on track for its strongest performance since October on Friday, as traders ratcheted up bets that interest rates in major economies will soon be heading down.
Key U.S. PCE data just released did little to change the narrative of inflation trending lower, and ensured equity and bond investors were happy to keep buying despite a groggy overnight session in Asia.
While Wall Street looked set for a breather after its string of record highs, Europe (.STOXX), opens new tab was heading for a 3% weekly jump following upbeat earnings from luxury giant LVMH (LVMH.PA), opens new tab and the interpretation of Thursday's Europe Central Bank meeting that it could be cutting rates by April.
ECB chief Christine Lagarde had stressed it was "premature" to discuss easing but various tweaks in her comments made money markets price an almost 85% chance of a first quarter point rate cut in April and an around 20% chance in March .
Germany's 10-year government bond yield , the benchmark for the euro area, dropped 3.5 basis points (bps) to hit 2.25%. Italy's 10-year yield fell 4.5 bps to 3.78%.
With the Fed's favoured inflation measure, the consumption expenditures (PCE) price index, coming in largely as expected at 2.6% year-on-year, U.S Treasury yields were a fraction lower on both the day and week at 4.11%.
State Street Global Markets' head of global macro strategy Michael Metcalfe said there was now an "interesting contrast" between current market price action and news flow.
"It feels like markets are playing a cat-and-mouse game with central banks, by pricing in more cuts and then waiting to see if they push back," he said.
ECB sources told Reuters that the bank was open to a change in its rhetoric at the next meeting, paving the way for an interest rate cut possibly in June, if upcoming data confirmed inflation had been brought under control.
The euro gained 0.3% to $1.0877 after the U.S. data, but was still track to end the week down around 0.2% against a dollar that - measured against top world currencies - was set for its third weekly gain of 2024.
Brent crude drifted down, meanwhile, after hitting its highest level since November at just over $82 a barrel , helped by the broader risk rally as well as latest data on U.S. crude inventories, which fell to their lowest level since October.
There was also fresh evidence that the Houthi attacks on commercial shipping in the Red Sea were having a broader impact, with Deutsche Bank's Jim Reid pointing out that Drewry’s World container Index was up for a seventh consecutive week.
"That’s now at $3,964 per 40ft container, which is nearly triple its levels from late-October, when costs were at a post-pandemic low," Reid said.
INFLATION GYRATIONS
Asian shares had fallen back as Tokyo's Nikkei and China's markets reversed, but MSCI's broadest index of Asia-Pacific shares ex-Japan (.MIAPJ0000PUS), opens new tab still snapped a three-week losing streak with a 1.8% weekly rise.
Data on Thursday showed the U.S. economy grew faster than expected in the fourth quarter amid strong consumer spending, defying dire predictions of a recession in the world's largest economy.
However, Intel's (INTC.O), opens new tab underwhelming revenue forecasts had pushed its stock some 10% lower in extended trading, which had then sent Asian semiconductor shares toppling on Friday.
Electric automaker Tesla's (TSLA.O), opens new tab latest sales warning this week saw it depart the "Magnificent Seven" of megacap stock leaders - shedding 12% and some $80 billion in market cap on Thursday.
Hong Kong's Hang Seng Index (.HSI), opens new tab slid 1.8%, dragged down by technology names, which knocked the Hang Seng Tech Index (.HSTECH), opens new tab down by nearly 4%.
Still, the main index remained on track for a weekly gain of 4%, its best performance in about a month thanks to supportive signals from Beijing this week that have helped steady China's battered markets.
China's central bank announced a deep cut to bank reserves on Wednesday, in a move that will inject about $140 billion into the banking system.
Investors poured almost $12 billion into Chinese equity funds in the week to Wednesday, a BofA Global Research report calculated on Friday. That marks the largest inflow since 2015 and the second largest ever.
China's CSI blue-chip index (.CSI300), opens new tab dipped 0.3% on Friday but scored a near 2% weekly gain. The Shanghai Composite (.SSEC), opens new tab inched up 0.1% on the day for a 2.5% weekly rise, its largest since July 2023.
Elsewhere, Japan's Nikkei (.N225), opens new tab slid 1.3%, retreating from a 34-year high hit at the start of the week, in part due to rising expectations that the Bank of Japan (BOJ) could soon exit its massive stimulus.
($1=7.1690 Chinese yuan renminbi)
Reporting by Marc Jones; Editing by Alex Richardson
