LDN - Business

Stocks firm, dollar retreats ahead of Fed decision

[February 01, 2023] By Tom Westbrook and Amanda Cooper

LONDON/SINGAPORE (Reuters) - Global stocks edged up on Wednesday as signs of slowing U.S. wage growth supported expectations that the Federal Reserve could signal an end to interest-rate hikes at its meeting later in the day.

Wall Street indexes had rallied, as had bonds to a lesser extent, while the dollar gave up gains overnight when the Fed's preferred wages gauge, the U.S. employment cost index, showed a 1% rise last quarter, its smallest increase in a year.

The MSCI All-World index was last up 0.2% on the day, having ended January with a 7% gain, thanks in large part to investors growing more optimistic about the outlook for global inflation and interest rates.

The Fed will announce its rate decision at 1900 GMT, followed by a news conference with Chair Jerome Powell.

Interest-rate markets have priced in a slowdown in the cracking pace of hikes, with Wednesday's expected 25 basis point (bps) hike seen bringing the Fed funds rate target range to 4.5-4.75%.

Barring surprises, the focus will be on Powell's tone. Investors will be trying to gauge whether and how hard he would push back on market pricing for rate cuts beginning as soon as the second half of this year.

"The market is anticipating some pushback from Powell, although it's difficult to pin down how much is enough to convince the market," said Brian Daingerfield, head of G10 currency strategy at NatWest Markets.

"Anything short of Powell going 10 for 10 hawkish may ultimately be seen as being not hawkish enough. Conversely, the market may take even the smallest dovish concession and run with it."

Strategist at ING said economic data should play a greater role in shaping investor expectations for monetary policy.

"One of the reasons is that central banks are purposefully behind the curve," Padraig Garvey, who is ING regional head of research for the Americas, said.

"Their past mistake in anticipating the inflation surge means they're unlikely to acknowledge it is going back to target until they have a much higher degree of confidence than now," he said.

"The other reason is that markets are correctly priced for the next few meetings."

In Europe, the STOXX 600 rose 0.2%, catching a lift from healthcare stocks including Danish pharma company Novo Nordisk and London-listed rival GSK, which reported results.

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Passersby walk past an electric stock quotation board outside a brokerage in Tokyo, Japan, December 30, 2022. REUTERS/Issei Kato/Files

Currency markets have also been treading water in the run-up to the Fed meeting, and ahead of the Bank of England and European Central Bank meetings on Thursday.

The dollar dropped for a fourth straight month in January, and lost 1.5% on the euro and 0.8% on the yen. The euro was last up 0.2% at $1.0882, while against the yen, the dollar fell 0.2% to 129.81.

U.S. Treasuries were cautiously firmer in Asia, with benchmark 10-year yields down 2 bps to 3.5069%. S&P 500 futures fell 0.3%.

EARNINGS, ECONOMICS

Japan's factory activity contracted for a third straight month in January, a private survey showed, while South Korea posted a record monthly trade deficit for January, mainly due to a far worse-than-expected drop in exports.

Facebook owner Meta reports earnings later on Wednesday. Company executives had struck a cautious tone at earnings calls on Tuesday as a slowdown looms. [.N]

Exxon posted a record $59 billion adjusted profit, though Caterpillar and McDonald's shares fell as the companies warned of inflation squeezing profit margins.

In commodity markets, optimism for demand supported oil prices and Brent crude futures rose 0.1% to $85.57 a barrel, while gold, which rallied on the dollar's weakness through January, fell 0.2% to $1,923.84 an ounce.

Indian conglomerate Adani Group, meanwhile, remained under pressure, with its flagship Adani Enterprises shares down 3% and below the lower end of the offer price for a $2.5 billion stock sale that ended on Tuesday.

Prices for dollar bonds in Adani Group companies steadied after last week's rout.

(Reporting by Tom Westbrook and Amanda Cooper; Editing by Jamie Freed, Kim Coghill and Arun Koyyur)

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