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Stocks Trim CPI-Fueled Gains With Fed Set to Hike: Markets Wrap

Stocks Trim CPI-Fueled Gains With Fed Set to Hike: Markets Wrap
A shopper on Powell Street in San Francisco, California, US, on Tuesday, Nov, 29, 2022. US retailers eked out modest growth over Black Friday weekend with deep discounts that lured shoppers seeking a reprieve from stubborn inflation.

US stocks trimmed a rally sparked by an unexpectedly strong slowdown in price growth last month, as attention turned to whether the Federal Reserve will alter its aggressive approach to battling inflation.

The S&P 500 jumped as much as 2.8% and the tech-heavy Nasdaq 100 rose as much as 3.9% before paring gains. Treasuries rallied, with the policy-sensitive two-year Treasury yield sinking more than 15 basis points after a key gauge of US consumer prices posted the smallest monthly advanced in more than a year. The greenback halted a two-day rally.The Fed is largely expected to raise rates by half a percentage point Wednesday, slowing the pace of increases. Investors will focus on what officials are projecting for the future of the Fed funds rate and any commentary on how it views the policy path for its next meeting in February.

Tuesday’s data, taken with the slower-than-projected CPI print in the prior month, validates the Fed’s projected move on Wednesday and sets the tone for future rate decisions. The swap markets have now trimmed their rate-hike wagers, with the odds now favoring a quarter-point hike as early as the Fed’s February meeting.

Read More: US Core CPI Posts Smallest Monthly Increase in More Than a Year

Still, some investors are approaching the CPI surprise cautiously.

“While the war against inflation is turning, we are a long way off declaring victory and the Fed will keep its hawkish stance for a while longer, even if it does potentially force a recession,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

The CPI-fueled stock rally fails to recognize that corporate earnings are just starting to see the impact of tight monetary policy, James Athey, investment director at Abrdn.

“As the full effects of the Fed’s aggressive actions this year play out next year, it seems inevitable that we will see a significant repricing lower in EPS forecasts and thus the broad market,” Athey said.

Following the Fed, the European Central Bank will announce its rate decision Thursday. Markets will also contend with decisions from the Bank of England and monetary authorities in Mexico, Norway, the Philippines, Switzerland and Taiwan.

Key events this week:

  • FOMC rate decision and Fed Chair news conference, Wednesday
  • China medium-term lending, property investment, retail sales, industrial production, surveyed jobless, Thursday
  • ECB rate decision and ECB President Lagarde briefing, Thursday
  • Rate decisions for UK BOE, Mexico, Norway, Philippines, Switzerland, Taiwan, Thursday
  • US cross-border investment, business inventories, empire manufacturing, retail sales, initial jobless claims, industrial production, Thursday
  • Eurozone S&P Global PMI, CPI, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 rose 1.3% as of 11:04 a.m. New York time
  • The Nasdaq 100 rose 2.1%
  • The Dow Jones Industrial Average rose 0.6%
  • The Stoxx Europe 600 rose 1.3%
  • The MSCI World index rose 0.5%

Currencies

  • The Bloomberg Dollar Spot Index fell 1%
  • The euro rose 0.9% to $1.0636
  • The British pound rose 1% to $1.2393
  • The Japanese yen rose 1.8% to 135.18 per dollar

Cryptocurrencies

  • Bitcoin rose 3.5% to $17,771.41
  • Ether rose 4% to $1,325.56

Bonds

  • The yield on 10-year Treasuries declined 15 basis points to 3.46%
  • Germany’s 10-year yield declined three basis points to 1.91%
  • Britain’s 10-year yield advanced nine basis points to 3.29%

Commodities

  • West Texas Intermediate crude rose 2.2% to $74.79 a barrel
  • Gold futures rose 1.6% to $1,821.70 an ounce

This story was produced with the assistance of Bloomberg Automation.

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