European stocks nudge higher as investors await US inflation data

European stocks rose and Wall Street futures traded in a tight range ahead of the release of December’s US inflation figures on a potentially pivotal day for global financial markets.

The regional Stoxx Europe 600 added 0.5 per cent and Germany’s Dax rose 0.25 per cent on Thursday, while London’s FTSE 100 gained 0.4 per cent, inching closer to an all-time high. Contracts tracking Wall Street’s blue-chip S&P 500 and those tracking the tech-heavy Nasdaq 100 were steady ahead of the New York open.

Investors are expecting a further slowdown in domestic price growth, with the publication of December’s headline consumer price index forecast to decline to 6.6 per cent from 7.1 per cent in November.

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 reopening and lower energy prices” are all encouraging investors back into risky assets after a dire year for markets in 2022, said Chris Turner, global head of markets at ING.

The S&P 500 on Wednesday registered its first back-to-back daily gains in three weeks, while the Nasdaq Composite notched its first four-day winning streak in four months, and an inflation number “in line with consensus probably allows the risk rally to continue”, Turner said.

At the same time, a higher than expected inflation figure, “now that folks are consensually expecting it to come in light or dovish, risks wrecking this recent re-risking”, and anyone betting against the dollar, said Charlie McElligott, equity derivatives strategist at Nomura.

Until now, cooling inflation accompanied by last month’s decline in US wage growth has bolstered investors’ hopes that the Fed will pause its aggressive monetary tightening campaign in the months ahead, reaching a lower terminal rate than previously forecast.

Rates markets are currently pricing in a roughly 75 per cent chance that the Fed lifts rates by 0.25 percentage points when it meets at the end of January, having raised borrowing costs by half a percentage point in December.

Markets expect the central bank’s main policy rate to peak just below 5 per cent in June before falling in the second half of the year, even though Fed officials maintain that rates will probably hover above 5 per cent for much of 2023.

A measure of the dollar’s strength against a basket of six other currencies was flat on Thursday, having declined more than 8 per cent over the past three months, partly on the back of cooling core inflation data.

“A significant upside [inflation] surprise today would provide more support for the US dollar as it would make it harder for the market to continue looking through recent hawkish Fed rhetoric,” said Lee Hardman, senior currency analyst at MUFG.