US stocks rose on Wednesday, with the Federal Reserve poised to slow the pace of interest rate rises against a backdrop of cooling inflation.
Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq Composite both added 0.5 per cent, consolidating a rally in the previous session after US consumer price inflation eased more than expected in November to its lowest level in almost a year.
US equities shot up in the hours immediately after the CPI figures were released on Tuesday but fizzled out later in the day as investors braced themselves for the Fed’s economic projections, which come out later on Wednesday.
“To what extent the [Federal Open Market Committee] focuses on the drop in inflation remains unclear but we suspect the message will be more about the length of time monetary policy will need to remain restrictive rather than on the timing of any pause in the tightening cycle,” said Derek Halpenny, head of research at MUFG.
Even so, a 0.5 percentage point rate rise on Wednesday would bring the Fed to within touching distance of the implied terminal rate of about 5 per cent, meaning a “pause” in increases may not be too far away.
The central bank’s forecasts, meanwhile, would “likely show weaker growth over the period to 2025, higher unemployment and inflation possibly a little lower”, Halpenny added.
The S&P 500 is on track for its biggest three-month gain since the second quarter of 2020, having risen roughly 12 per cent since the start of October, though some analysts doubt how long left the rally has to run.
“Given stocks don’t typically see a turning point until rate cuts are on the horizon, we still don’t believe a sustained rally is likely over the next three to six months,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.
A measure of the dollar’s strength against a basket of six peers fell 1.1 per cent in the previous session but traded flat on Wednesday. The currency typically acts as a haven for investors during times of economic turbulence and has tumbled about 8 per cent since hitting a 20-year high in late September as inflationary fears have subsided.
US government debt continued a rally that began on Tuesday, with the yield on the two-year Treasury, which is particularly sensitive to interest rate expectations, down 0.04 percentage points at 4.18 per cent. Yields fall as prices rise.
Elsewhere in equity markets, the regional Stoxx Europe 600 fell 0.2 per cent and London’s FTSE 100 was flat, despite UK inflation slowing to 10.7 per cent in November, down from 11.1 per cent in October.
“The inflation number in the UK came in better than expected but let’s not forget what level it actually is,” said Neil Birrell, chief investment officer at Premier Miton. The Bank of England, which meets on Thursday, “isn’t about to suddenly get dovish off these big numbers and that’s probably what people are reflecting on”.
Sterling rose 0.2 per cent against the dollar to $1.238.
Asian stocks rose, with Japan’s Topix adding 0.6 per cent, South Korea’s Kospi gaining 1.3 per cent and China’s CSI 300 up 0.2 per cent after dropping earlier. Hong Kong’s Hang Seng index gained 0.4 per cent.
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