Stocks creep higher as inflation data offers hope ahead of Fed

[January 04, 2023]  By Ankur Banerjee and Lawrence White

SINGAPORE/LONDON (Reuters) - European and Asian shares rose on Wednesday thanks to positive news about inflation and China's strict anti-COVID measures, while the dollar backpedalled as investors await minutes from the Federal Reserve's most recent meeting.

The pan-European STOXX 600 was up 0.9% by 0835 GMT as a lower inflation reading from France boosted sentiment, adding to encouraging data from Germany earlier in the week.

MSCI's broadest index of Asia-Pacific shares outside Japan was 1.8% higher and set for a third straight day of gains for the year, having fallen 20% in 2022, its worst performance since 2008.

The gains in both regions showed some optimism about two of the factors that made 2022 such a hellish year for investors, namely spiralling inflation and the impact on economic growth of anti-COVID restrictions in major economies such as China.

But jitters in other assets showed the path ahead will be far from smooth as policymakers grapple with trying to increase rates to curb inflation without stifling the economic recovery.

Minutes from the Fed's December meeting, when it cautioned rates may need to stay higher for longer, are due to be released later on Wednesday. Investors will parse the minutes to figure out whether more policy tightening is likely.

"The market has made a pretty tentative start to the year ... (and) is still grappling with the notion of what we are going to see from the Fed this year," said Rob Carnell, head of ING's Asia-Pacific research.

"There are two camps out there and they are wrestling for dominance in terms of the view. Some days higher-for-longer wins, some days (the) higher-then-lower camp wins," Carnell said.

U.S. shares, which have started the year more tentatively amid big falls in key stocks such as Tesla, looked set to open with modest gains. E-mini futures for the S&P 500 rose 0.5%.

The U.S. central bank said last month when it raised interest rates by 50 basis points that the terminal rates may need to remain higher for longer to fight inflation.

Markets however are pricing in rate cuts for late 2023, with fed fund futures implying a range of 4.25% to 4.5% by December.

Investors will get a better picture of the U.S. labour market this week, with several pieces of data scheduled, culminating in the employment report on Friday.

A man on a bicycle stands in front of an electronic board showing Shanghai stock index, Nikkei share price index and Dow Jones Industrial Average outside a brokerage in Tokyo, Japan September 22, 2022. REUTERS/Kim Kyung-Hoon

A weakening jobs market is seen as one of the key pieces needed to convince the Fed to begin slowing its monetary tightening path.

"It is too early to start betting on a Fed pivot this year, and that should make this difficult environment for stocks," said Edward Moya, senior market analyst at Oanda in New York.

The dollar index, which measures the greenback against six other currencies, fell 0.74% after rising 1% overnight in a sign of investors' uncertainty about the path forward for rates.

The yield on 10-year Treasury notes fell to 3.6958%, and 2-year Treasury yields, which typically move in step with interest rate expectations, slipped 6 basis points.

Sterling was last trading at $1.2055, up 0.74%, while the euro rose 0.6% to $1.0610, coming off a three-week low of $1.0519 touched overnight.

The dollar's weakness lifted gold, with spot prices up 1%.

The Japanese yen strengthened 0.12% versus the greenback to 130.85 per dollar.

Chinese stocks climbed, while Hong Kong's Hang Seng Index jumped to its highest since July as equity investors remained optimistic about a recovery in the wake of China dismantling its stringent "zero-COVID" policy.

Oil prices slid further however as concerns about weak global demand and the possibility of further U.S. interest rate increases outweighed any optimism about the benefits of China's policy change.

"Fresh warnings about the effect of aggressive rate hikes on the U.S. economy are rattling traders again, with the oil price continuing its march downwards," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

U.S. crude fell 1.62% to $75.68 per barrel, while Brent was at $80.68, down 1.73% on the day.

(Reporting by Ankur Banerjee and Lawrence White; Editing by Sam Holmes and Jan Harvey)

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