Global stocks soared on Tuesday after U.S. consumer price figures showed inflation in the world’s largest economy continued to decline in November, bolstering the Federal Reserve’s case for of a lower interest rate hike when it meets later this week.
Annual consumer price growth in the United States slowed to 7.1% in November, from 7.7% in October and the smallest 12-month increase since December 2021. Monthly inflation rose by 0, 1%, less than the 0.3 percent increase predicted by economists.
Contracts tracking Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 jumped 2.3% and 3.2% respectively, while Europe’s Stoxx 600 added 1.7% and the FTSE London’s 100 rose 0.9%.
The closely watched “core” measure of inflation, which excludes volatility in food and energy prices and is considered the best predictor of the future path of inflation, rose 0.2% in November, after increasing by 0.3% in October.
The latest numbers mean Fed Chairman Jay Powell is almost certain to raise interest rates by 0.5 percentage points on Wednesday, ending a streak of four consecutive 0.75 percentage point moves. . However, analysts have warned that the central bank still has a lot of work to do to bring inflation back to the 2% target.
“At the end of the day, yes, the pace of rate hikes is slowing down, but that doesn’t mean there’s a [Fed] pivot coming soon,” said Lale Akoner, senior market strategist and economist at BNY Mellon Investment Management, who expects rates to fall sometime in 2024.
Others were more optimistic. “Inflation in the United States is likely to be a problem of the past,” said Florian Ielpo, head of macro at Lombard Odier Asset Management. “The market enemy of 2022 is being defeated and that justifies lower yields, tighter spreads and higher stocks.”
US government bonds rallied across the board, with the two-year Treasury yield, which is particularly sensitive to interest rate expectations, falling 0.17 percentage points to 4.22% as that the price of the debt instrument increased.
The dollar has fallen since hitting a 20-year high in late September and weakened further against a basket of six peers on Tuesday, down 1.1%.
The Fed’s economic projections for unemployment, gross domestic product and inflation will take center stage on Wednesday, with investors on the lookout for clues about where U.S. interest rates could peak in 2023. Markets now expect interest rates to peak at around 4.85 percent. percent in May, compared to just under 5% in the same month before the release of November inflation data.
The European Central Bank and Bank of England are also meeting this week and are expected to tighten monetary policy less aggressively than in recent months, despite mixed economic data.
Eurozone core inflation – which excludes changes in energy, food and tobacco prices – remained at a record high of 5% in November, while data released on Tuesday by the UK’s Office for National Statistics showed private sector wage growth across the country accelerated in the three months to October.
“The US economy has remained relatively resilient throughout the past year, but that is not the case in the UK or Europe,” said David Dowsett, global head of investments at GAM. “It gives these central banks a hedge, or more than a hedge – evidence – to slow the pace of rate hikes as well.”
In Asia, Hong Kong’s Hang Seng Index rose 0.7%, while Japan’s Topix gained 0.4%. The Chinese CSI 300 fell 0.2%.
