World stocks edged higher and the dollar crept up from eight-month lows on Friday as data showing the U.S. economy is on a lower growth path and inflation is slowing kept alive hopes the Federal Reserve would ease its aggressive tightening next week
U.S. consumer spending fell for a second straight month in December, while inflation continued to subside, the Commerce Department said, allowing the Fed to slow the pace of its interest rate hikes when policymakers meet next week.
MSCI’s gauge of stock performance in 47 countries (.MIWD00000PUS) gained 0.22%, after the index earlier hit fresh five month highs, while the dollar index rose 0.216%.
A 5.0% annualized increase in the personal consumption expenditures (PCE) price index, the smallest gain since September 2021 in the Fed’s preferred measure of inflation, indicated progress, said Russell Price, senior economist at Ameriprise Financial, Troy, Michigan.
“Today’s reading shouldn’t alter the views of Fed officials, just so long as they were expecting further progress. But success is still far down the line,” Price said, referring to the Fed’s battle to lower inflation to its 2% target.
Futures showed the market pricing in a slightly higher peak in June of the Fed’s overnight lending rate at 4.917%, and then easing to 4.478% in December on expectations of a rate cut.
While the market expects the Fed to cut rates as the U.S. economy slows, current rates already are considered restrictive and investors fear further tightening could lead to a recession.
Wall Street pared some of its initial gains, trading near breakeven. The Dow Jones Industrial Average (.DJI) rose 0.14%, the S&P 500 (.SPX) gained 0.18% and the Nasdaq Composite (.IXIC) added 0.51%.
“In the short-run the rally (in markets) is over extended and there is a need for consolidation, especially on the equities side,” said Francois Savary, chief investment officer at Prime Partners.
Besides the Fed, investors await central bank meetings by the European Central Bank and Bank of England next week and how officials will respond to data showing major economies are holding up rather well with inflation moving lower.
“The data at the moment is kind of telling you what you thought you knew – that inflation is slowing but that the labour market remains tight,” said Societe Generale strategist Kit Juckes
“Everyone is now saying perhaps we have gone too far in January,” he added, pointing to the big moves in the dollar, yen and euro.
Sterling slipped 0.15% to $1.2387 on investor unease that a British slowdown may prompt the BoE to end its tightening cycle soon, a move that could weaken the pound in the short-term.
The euro slid 0.29% to $1.0857, just off from a nine-month high of $1.09295 it touched on Monday.
Treasury yields rose after Japanese inflation data surprised on the upside. Core consumer prices in Tokyo, a leading indicator of nationwide trends in Japan, rose 4.3% in January from a year earlier, marking the fastest annual gain in nearly 42 years.
The yield on 10-year Treasury notes rose 3.5 basis points to 3.526%.
Asia-Pacific shares maintained their best start to a year (.MIAPJ0000PUS) overnight with a nine-month high despite ongoing drama in India, where shares of Adani Enterprises (ADEL.NS) sank another 20% in the wake of Hindenburg Research’s report about the firm’s debt levels and use of tax havens.
Oil prices rose for a second session, buoyed by better than expected U.S. economic growth, strong middle distillate refining margins and hopes of a rapid recovery in Chinese demand.
U.S. crude fell 1.11% to $80.11 per barrel and Brent was at $86.77, down 0.8% on the day.
Spot gold added 0.1% to $1,931.01 an ounce.