The headquarters of the European Central Bank
Equity markets have risen despite warnings from the US Federal Reserve and the European Central Bank, pictured, that interest rates have further to climb © Thomas Lohnes/Getty Images

US stocks rose as investors prepared for inflation data that analysts expect to show a slowdown in domestic price growth, which could buoy the hopes of traders despite hawkish messaging from the Federal Reserve.

On Wall Street, the blue-chip S&P 500 closed 1.3 per cent higher on Wednesday, while the tech-heavy Nasdaq Composite added 1.8 per cent. It marked the first time in about three weeks the S&P 500 had notched back-to-back daily gains, while the Nasdaq Composite scored its first four-day winning streak in four months.

The gains come ahead of US inflation data due to be released on Thursday morning. Analysts expect the headline consumer price index will moderate to 6.5 per cent in December, down from 7.1 per cent in November. Investors have seized on economic data that have shown a slowdown in price growth and softness in a still-tight US labour market, even though members of the Fed this week reiterated their intention to hold the federal funds rate at a restrictive level to stamp out high inflation.

“More risk-tolerant investors can look to anticipate this turn [in monetary policy] by phasing into markets, seeking early winners from a global improvement in sentiment, and identifying beneficiaries from China’s reopening,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote on Tuesday. “However, we don’t believe we have yet reached the inflection point in policy or economic growth.”

Across the Atlantic, Britain’s FTSE 100 moved within striking distance of an all-time high as growing investor optimism that inflation had peaked boosted US and European stocks.

The UK’s benchmark stock index rose 0.4 per cent, leaving it within about 2 per cent of the historic peak it reached in May 2018.

The gains in the London market echoed other regional bourses, with the regional Stoxx Europe 600 adding 0.4 per cent and Germany’s Dax rallying 1.2 per cent.

UK markets lagged behind the big US equity rally in 2020 and 2021, which was led by high-flying growth stocks such as Apple, Alphabet and Tesla. But the FTSE 100 dodged the carnage in global equities last year because it is filled with the type of companies that prospered in an environment where interest rates and energy prices were rising.

Shell, the Anglo-Dutch oil major that is the second-biggest company on the London Stock Exchange, gained 43 per cent last year. HSBC, the banking heavyweight, gained 15 per cent as higher interest rates boosted its profits. In dollar terms, their gains would have been smaller, at 28 per cent and 3 per cent, respectively.

The rallies contrasted sharply with big US companies, with the tech-heavy Nasdaq Composite shedding a third of its value last year.

Line chart of Previous peak was in May 2018 showing FTSE 100 within striking distance of all-time high

Equity markets on both sides of the Atlantic have advanced this year on the back of signs inflation in many of the world’s biggest economies is softening and despite warnings from the Fed and the European Central Bank that interest rates have further to climb.

Figures out on Thursday are expected to show that US consumer price growth continued to slow in December. Inflation also appears to have peaked in Europe, with price growth slowing in France, Germany and Spain.

Central bank officials insist it would be premature to pause their monetary tightening campaigns. Projections published in December show most Fed officials expecting the fed funds rate to peak at between 5 per cent and 5.25 per cent, up from its current level of between 4.25 per cent and 4.5 per cent. ECB president Christine Lagarde said in December that markets should expect rates to rise “at a 50-basis-point pace for a period of time”.

The size of future interest rate increases — as well as the depth of the recessions expected in Europe and the US later this year — now dominates debate.

“A friendly December [consumer prices index] print sets up for a 25bp hike and that could very well prove to be the end for this cycle,” said Steven Blitz, chief US economist at TS Lombard. “Beyond the near term, mild recession or no recession, inflation will be settling closer to 3 per cent than 2 per cent, owing to the structural imbalance in the labour market.”

Jobs growth in the world’s biggest economy slowed for a fifth consecutive month in December, while wage growth declined to 4.6 per cent and the unemployment rate fell to a historic low. Fed officials have made it clear that inflation continuing to cool depends to a large extent on unemployment rising later this year, even as the economy grapples with worker shortages in service sectors such as hospitality and travel.

In Asia, Hong Kong’s Hang Seng index rose 0.5 per cent, taking its gains since the start of November to 45 per cent. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 0.2 per cent.

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