European stocks rise as investors await US inflation data

European stocks rose and Wall Street futures traded in a narrow range ahead of the release of December US inflation figures in what could be a pivotal day for global financial markets.

The regional Stoxx Europe 600 gained 0.5 percent and Germany’s Dax rose 0.25 percent on Thursday, while London’s FTSE 100 gained 0.4 percent, nearing an all-time high. Contracts, which track Wall Street’s blue-chip S&P 500 and tech-heavy Nasdaq 100, were stable ahead of the New York open.

Investors are expecting domestic price growth to slow further, with the December CPI release forecasting a fall to 6.6 percent from November’s 7.1 percent.

Although several Federal Reserve officials have insisted interest rates are unlikely to fall until 2024, expectations of “an easing cycle in the second half of the year, China’s reopening and lower energy prices” are encouraging investors again after a bleak year for 2020 investing in risky assets markets in 2022,” said Chris Turner, Global Head of Markets at ING.

The S&P 500 posted its first consecutive daily gains in three weeks on Wednesday, while the Nasdaq Composite posted its first four-day gains streak in four months, and an inflation read “in line with consensus is likely to allow the risk rally to continue,” Turner said.

At the same time, a higher-than-expected inflation number “now that people are consensually expecting it to turn bright or dovish risks ruining this recent renewed risk,” and anyone betting against the dollar, said Charlie McElligott, equity derivatives strategist at Nomur .

So far, the slowdown in inflation coupled with the slowdown in US wage growth over the past month has boosted investor hopes that the Fed will pause its aggressive monetary tightening campaign in the coming months and end with a lower than previously forecast rate.

Rates markets are currently pricing in around a 75 percent chance that the Fed will hike rates by 0.25 percentage point at its late January meeting, after raising borrowing costs by half a percentage point in December.

Markets expect the central bank’s main interest rate to peak just below 5 percent in June before falling in the second half of the year, although Fed officials say rates are likely to remain above 5 percent for much of 2023.

A measure of the dollar’s strength against a basket of six other currencies was unchanged on Thursday after falling more than 8 percent over the past three months, in part on cooling core inflation data.

“A clear advantage [inflation] Today’s surprise would provide more support for the US dollar as it would be harder for the market to continue to read recent hawkish Fed rhetoric,” said Lee Hardman, Senior Currency Analyst at MUFG.

https://www.ft.com/content/72bd0df3-4815-40ae-90f9-724a7dcd2285 European stocks rise as investors await US inflation data

Adam Bradshaw

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