European stocks edged higher and Wall Street futures slipped on Friday after US inflation eased further in December, boosting the chances of a smaller interest rate rise when the Federal Reserve meets later this month.
The regional Stoxx Europe 600 added 0.4 per cent in mid day trading, London’s FTSE 100 gained 0.5 per cent and Germany’s Dax added 0.2 per cent. Contracts tracking Wall Street’s blue-chip S&P 500, meanwhile, were down 0.4 per cent, while those tracking the tech-heavy Nasdaq 100 shed 0.5 per cent ahead of the opening bell.
The moves come after data on Thursday showed annual US inflation declined for the sixth consecutive month to 6.5 per cent, the lowest consumer price index reading in a year. Rates markets immediately priced in a higher probability that the Fed will slow the pace of its monetary tightening at its next meeting in three weeks, with a 0.25 percentage point rise now firmly expected to follow December’s half percentage point move.
“The Fed is getting closer to the end of the rate hiking cycle, which we believe is likely by the end of the first quarter,” said analysts at UBS Global Wealth Management. Even so, the “tightness of the labour market” means rates are unlikely to fall any time soon, with the US unemployment rate at a 50-year low, jobs vacancy rates elevated and the quit rate — “which is correlated with wage growth” — too high to justify a so-called Fed pivot any time soon.
Companies including Amazon, Meta, Twitter and Goldman Sachs have all begun to lay off workers, however, while figures from the Bureau of Labor Statistics show average hourly earnings rose by less than expected in December.
A measure of the dollar’s strength against a basket of six other currencies fell 0.2 per cent on Friday, after declining 0.9 per cent in the previous session. The world’s de facto reserve currency has shed almost 10 per cent over the past three months.
US government bonds continued to rally, with the yield on the two-year Treasury note, which is particularly sensitive to interest rate expectations, falling 0.02 percentage points to 4.11 per cent, down from a peak of 4.7 per cent in November.
“Treasury yields tend to decline by 50 to 60 [basis points] on average once the Fed goes on hold, and with our final expected rate hike still over two months away, this rally seems somewhat premature,” said analysts at JPMorgan.
Elsewhere in equity markets, Hong Kong’s Hang Seng index gained 1 per cent and China’s CSI 300 index of Shanghai- and Shenzhen-listed shares added 1.4 per cent. Data out on Friday showed China’s exports suffered the sharpest fall in almost three years in December, declining 9.9 per cent on an annual basis in dollar terms.
