Inflation failed to steal Christmas from investors

By JustMarkets

The US consumer inflation rate fell from 7.7% to 7.1% year-over-year. Core inflation (which excludes food and energy prices) also fell from 6.3% to 6.1%. Overall, the latest data provided the strongest evidence that the United States inflation is slowing steadily. The markets reacted with an impulse to this data. As the stock market closed Tuesday, the Dow Jones Index (US30) increased by 0.30%, and the S&P 500 Index (US500) jumped by 0.73%. The technology index NASDAQ (US100) was up 1.01% on Tuesday. All three indices closed the day in positive territory.

There is a 79.4% chance that the Fed will raise interest rates by 0.5% today. This move will follow four hikes of three quarters in a row. A half-point hike would put the Fed’s key short-term rate at 4.5%. Markets will also be watching closely for Fed Chairman Jerome Powell’s speech after the Fed meeting to see signs of whether the Central Bank believes inflation has declined enough to continue lowering the pace of interest rate hikes.

But the inflation report has some negative things to say. For example, the cost of housing, which makes up nearly a third of the US consumer price index, continues to rise. But real-time rent and home price indicators are starting to fall. The real estate market remains in recession.

President Joe Biden called the inflation report “good news for families across the country” and noted that lower car and toy prices should benefit holiday shoppers. Nevertheless, Biden acknowledged that inflation may not return to “normal levels” until late next year.

Equity markets in Europe were mostly up yesterday. The German DAX (DE30) gained 1.34%, the French CAC 40 (FR40) added 1.42%, the Spanish IBEX 35 (ES35) jumped by 0.83%, the British FTSE 100 (UK100) closed Tuesday in plus 0.76%.

Unlike the US Federal Reserve, the ECB is still far from completing its monetary tightening cycle. The ECB politicians will meet tomorrow, expecting to raise the interest rate by 0.5%. But with a high probability, the “lowering” of the step from 75 to 50 basis points will be accompanied by more aggressive quantitative tightening (QT). Experts believe that the ECB will phase out reinvestment of its asset purchase program portfolio during 2023.

The ZEW economic sentiment indicator for Germany rose by 13.4 points from 36.7 to 23.3. The German economic sentiment indicator also continues to improve and is currently at 61.4, up 3.1 points from the previous month. Germany’s economic outlook has thus become significantly more optimistic over the past two months.

Gold prices hit a six-month high amid slowing US inflation. Prices of precious metals are inversely correlated with the dollar index and government bond yields, so when the dollar falls, gold and silver prices rise.

The price of oil surpassed $80 a barrel on Tuesday and recorded its biggest daily gain in more than a month as investors bought up risky assets after US data pointed to a slowdown in inflation. Concerns over oil supply disruptions, including the ongoing shutdown of the Keystone pipeline from Canada to the US after a major leak last week, also supported the market.

Asian markets were mostly up yesterday. Japan’s Nikkei 225 (JP225) gained 0.44%, China’s FTSE China A50 (CHA50) was down by 0.02%, Hong Kong’s Hang Seng (HK50) jumped by 0.68% on the day, India’s NIFTY 50 (IND50) added 0.60%, and Australia’s S&P/ASX 200 (AU200) was up 0.31% on the day.

Sentiment among Japan’s big manufacturers deteriorated in the fourth quarter amid rising price pressures, a Bank of Japan survey showed Wednesday, although the lifting of restrictions because of COVID-19 boosted service sector sentiment. The Tankan Large Non-Manufacturers Index jumped to 19 in the fourth quarter, beating expectations of 17 and the previous quarter’s reading of 14. Japan’s manufacturing sector has been hit hard by rising inflation and a weaker yen this year, which has increased manufacturing costs. Although most manufacturers have passed these costs on to customers, this has also had a negative impact on sales.

S&P 500 (F) (US500) 4,019.65 +29.09 (+0.73%)

Dow Jones (US30) 34,108.64 +103.60 (+0.30%)

DAX (DE40) 14,497.89 +191.26 (+1.34%)

FTSE 100 (UK100) 7,502.89 +56.92 (+0.76%)

USD Index 105.02 +0.21 (+0.20%)

• – Australia RBA Gov Lowe Speaks at 00:30 (GMT+2);
• – Japan Tankan Manufacturing (q/q) at 01:50 (GMT+2);
• – Japan Non-Tankan Manufacturing (q/q) at 01:50 (GMT+2);
• – Japan Industrial Production (m/m) at 06:30 (GMT+2);
• – UK Consumer Price Index (m/m) at 09:00 (GMT+2);
• – Spanish Consumer Price Index (m/m) at 10:00 (GMT+2);
• – Eurozone Industrial Production (m/m) at 12:00 (GMT+2);
• – US Crude Oil Reserves (w/w) at 17:30 (GMT+2);
• – US Fed Interest Rate Decision at 21:00 (GMT+2);
• – US FOMC Statement at 21:00 (GMT+2);
• – US FOMC Press Conference at 21:30 (GMT+2);
• – New Zealand GDP (q/q) at 23:45 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.