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US stocks edged higher and the dollar weakened on Wednesday after retail sales and producer prices declined in December, lifting the chances of a smaller rate increase when the Federal Reserve meets in two weeks.
Wall Street’s blue-chip S&P 500 gained 0.5 per cent, buoyed by energy, consumer cyclicals and basic materials stocks, while the tech-heavy Nasdaq Composite rose 0.8 per cent. A measure of the dollar’s strength against a basket of six peers fell 0.6 per cent, with the currency having weakened 9.8 per cent over the past three months as investors have increased their bets that inflation has peaked.
US government bonds rallied along with stocks, with the yield on 10-year Treasuries falling 0.15 percentage points to 3.38 per cent, down from a peak of 4.24 per cent in late October. Bond yields move inversely to prices.
The moves came after US retail sales fell 1.1 per cent in December from the previous month, data from the department of commerce show, with economists polled by Reuters having predicted a smaller 0.3 per cent decline. The producer price index, which tracks the prices businesses receive for their goods and services, fell 0.5 per cent month on month — more than the 0.1 per cent drop forecast by economists.
Services inflation rose 0.1 per cent, meanwhile, sending “a more dovish signal about price pressures in the wage-sensitive parts of the economy”, according to analysts at Morgan Stanley.
The US bank earlier this week doubled down on its bearishness on the dollar, which soared in the first half of 2022 as US interest rates climbed in response to surging price growth.
Investors are growing increasingly confident that inflation has peaked on either side of the Atlantic, however, while China’s economic reopening has eased fears of a protracted global recession later this year.
Gita Gopinath, deputy managing director of the IMF, signalled this week that the fund would upgrade its economic forecasts, while Germany’s chancellor, Olaf Scholz, told Bloomberg that the eurozone’s largest economy would avoid a recession.
Analysts at ING struck a gloomier tone, arguing that data out on Wednesday showing US industrial production fell 0.7 per cent month on month in December suggested the world’s biggest economy might already be in recession.
Rates markets are pricing in a roughly 90 per cent chance the Fed raises its main policy rate by a quarter percentage point when it meets at the start of February, following a half percentage point rise in December.
“If Fed members are leaning towards 50 [basis points], they will need to make some public noises and drop the breadcrumbs,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “The ball is in the Fed’s court.”
Interest rates may be closer to peaking, but the effects of last year’s aggressive monetary tightening, when US borrowing costs rose about 4.25 percentage points, are only just beginning to show up in corporate results.
Analysts at S&P Global said they expected the impact from the “fastest pace of rate hikes in recent history to increasingly show in issuers’ operating performance and trading outlooks” as fourth-quarter earnings were released over the next few weeks.
Elsewhere, the Bank of Japan opted against a further tweak to its yield curve control measures, pushing stocks higher and sending the yen lower against the dollar. The yield on 10-year Japanese bonds fell to 0.43 per cent from 0.5 per cent, while Japanese government bond swaps, which provide a hint of where markets expect yields to end up, fell to 0.81 per cent from 0.91 per cent.
Hong Kong’s Hang Seng index rose 0.5 per cent and China’s CSI 300 shed 0.2 per cent.
Europe’s Stoxx 600 added 0.5 per cent, while Germany’s Dax rose 0.3 per cent, erasing earlier losses. London’s FTSE 100 traded in a tight range, slightly below a record high, as UK inflation slowed for the second month in a row, declining to 10.5 per cent in December from an 11.1 per cent peak in October. Sterling gained 0.9 per cent against the dollar to $1.24.
Prices for Brent crude, the international benchmark, rose 1.16 per cent on Wednesday to $83.44 a barrel, with the International Energy Agency forecasting that demand for oil will hit an all-time high in 2023 as China reopens.
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Image and article originally from www.ft.com. Read the original article here.