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Stocks rise, dollar retreats ahead of Fed decision

2023-02-01T13:19:51Z

Global stocks rose on Wednesday as signs of slowing U.S. wage growth supported expectations the Federal Reserve could signal an end to interest-rate hikes at its meeting later on.

U.S. benchmark indices rallied and bond prices rose, while the dollar eased 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 (.MIWD00000PUS) 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 pace of hikes, with Wednesday’s expected 25 basis point (bps) increase seen bringing the Fed funds rate target range to 4.5%-4.75%.

Investors will try to gauge whether and how hard Fed Chair Jerome Powell will 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.”

Data on Wednesday showed headline inflation in the euro zone moderated to 8.5% in January, from 9% in December, while core prices picked up to 7% from 6.9%. This measure will keep the heat on the ECB to raise interest rates, as it could prove much tougher to tame.

“As the ECB’s attention is gradually turning away from the main measure and on to core inflation, we think that falls in headline inflation will do little to stem the central bank’s hawkishness,” said Mateusz Urban at Oxford Economics.

In Europe, the STOXX 600 (.STOXX) rose 0.3%, boosted by industrials and tech stocks, while an early lift from healthcare stocks faded.

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. Treasury prices edged higher, pushing the benchmark 10-year yield down 4 bps to 3.4846%. S&P 500 futures fell 0.2%.

Investors are more sanguine about the outlook for inflation, but cracks are appearing in the global economy.

Manufacturing activity across Europe and Asia contracted again last month, underscoring the fragility of the global economic recovery, although factories in the euro zone at least may have passed the trough, surveys showed on Wednesday.

Facebook owner Meta (META.O) reports earnings later on Wednesday. Company executives had struck a cautious tone at earnings calls on Tuesday as the economy slows.

Exxon (XOM.N) posted a record $59 billion adjusted profit, though Caterpillar (CAT.N) and McDonald’s (MCD.N) 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 0.3% to $85.74 a barrel, while gold , which rallied on the dollar’s weakness through January, rose 0.1% to $1,928.20 an ounce.

Indian conglomerate Adani Group, meanwhile, remained under pressure, with its flagship Adani Enterprises (ADEL.NS) 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.

Related Galleries:

A trader works at the Frankfurt stock exchange, amid the coronavirus disease (COVID-19) outbreak, in Frankfurt, Germany, December 30, 2020. REUTERS/Ralph Orlowski

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

The Federal Reserve building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts
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