European stocks climb as investors call peak inflation

European stocks edged higher and Wall Street futures slipped on Wednesday, as investors looked ahead to the release of December’s US inflation data later this week.

The regional Stoxx Europe 600 added 0.4 per cent, Germany’s Dax gained 0.3 per cent and London’s FTSE 100 rose 0.5 per cent to its highest level since August 2018. Contracts tracking Wall Street’s benchmark S&P 500 fell 0.1 per cent and those tracking the tech-heavy Nasdaq 100 shed 0.2 per cent ahead of the New York open.

Equity markets on either side of the Atlantic have inched higher so far this year on the back of signs that inflation has peaked, and despite warnings from the US Federal Reserve and the European Central Bank that interest rates have further to climb.

Figures out on Thursday are expected to show US consumer price growth continued to slow in December. Inflation also appears to have peaked in Europe, with price growth slowing in France, Germany and Spain.

Central bank officials insist it would be premature to pause their monetary tightening campaigns just yet, however. Projections published in December show most Fed officials anticipate the fed funds rate peaking at between 5 per cent and 5.25 per cent, up from its current level between 4.25 per cent and 4.5 per cent. ECB president Christine Lagarde said in December that markets should expect rates to rise “at a 50-basis-point pace for a period of time”.

The size of future interest rate increases — as well as the depth of the recessions expected in Europe and the US later this year — now dominates debate.

“A friendly December [consumer prices index] print sets up for a 25 basis point hike and that could very well prove to be the end for this cycle,” said Steven Blitz, chief US economist at TS Lombard. “Beyond the near term, mild recession or no recession, inflation will be settling closer to 3 per cent than 2 per cent, owing to the structural imbalance in the labour market.”

Jobs growth in the world’s biggest economy slowed for a fifth consecutive month in December, while wage growth declined to 4.6 per cent and the unemployment rate fell to a historic low. Fed officials have made it clear that inflation continuing to cool depends to a large extent on unemployment rising later this year, even as the economy grapples with worker shortages in service sectors such as hospitality and travel.

US government bonds have rallied so far this year on expectations of slowing interest rate increases and continued to do so on Wednesday. The yield on the two-year Treasury note, a measure of where investors expect interest rates to move in the short term, fell 0.03 percentage points to 4.22 per cent.

In Asia, Hong Kong’s Hang Seng index rose 0.5 per cent, taking its gains since the start of November to 45 per cent. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 0.2 per cent.

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