US stocks and Treasuries rallied after data showed US inflation continued to slide in December, easing pressure on the Federal Reserve to make further sharp interest rate rises.
Wall Street’s blue-chip S&P 500 reversed an early dip to close 0.3 per cent higher for the day, its third consecutive day of gains. The tech-heavy Nasdaq Composite rose 0.6 per cent.
The moves came after a report from the Department of Labor showed annual consumer price growth in the US fell to 6.5 per cent in December, down from 7.1 per cent in November and broadly in line with economists’ expectations. The closely watched “core” measure of inflation, which strips out volatile food and energy prices, clocked in at a rate of 5.7 per cent, down from 6 per cent the previous month.
The latest figures raised expectations that the Fed will further slow the pace of its interest rate rises with a 0.25 percentage point increase at its next policy meeting at the end of January. Last month the central bank lifted rates 0.5 percentage points after a string of larger 0.75 percentage point increases.
Investors are increasingly debating the timing of a potential “pivot” by the Fed, despite officials’ insistence that rates are unlikely to fall until 2024. Chris Turner, global head of markets at ING, said expectations of an “easing cycle in the second half of the year, China’s reopening and lower energy prices” were all encouraging investors back into risky assets.
Thursday marked the first time the S&P 500 had risen three days in a row since early November, while the Nasdaq recorded its first five-day winning streak since last July.
An inflation number “in line with consensus probably allows the risk rally to continue”, Turner said.
Prior to Thursday’s data release, rates markets were pricing in a roughly 75 per cent chance of a 0.25 percentage point increase at the next Fed meeting, which would bring its benchmark interest rate to a target range of 4.5 per cent to 4.75 per cent. By Thursday afternoon this had increased to more than 96 per cent.
Markets also moderately dialled back where they expect the central bank’s main policy rate to peak later this year, with investors anticipating that borrowing costs will crest at about 4.9 per cent in June.
US government bonds rallied across the board, with the yield on the two-year Treasury note, which is particularly sensitive to interest rates, falling 0.1 percentage points to 4.13 per cent. The yield on the benchmark 10-year Treasury note fell 0.13 percentage points to 3.42 per cent. Bond yields fall when prices rise.
A measure of the dollar’s strength against a basket of six other currencies fell 0.9 per cent on Thursday, having declined more than 8 per cent over the past three months, partly on the back of cooling core inflation data.
Elsewhere in equity markets, Europe’s Stoxx 600 added 0.6 per cent and Germany’s Dax rose 0.7 per cent on Thursday, while London’s FTSE 100 gained 0.9 per cent, inching closer to an all-time high. In Asia, Hong Kong’s Hang Seng rose 0.3 per cent and China’s CSI 300 of Shanghai and Shenzhen-listed stocks added 0.2 per cent.