Slowing inflation may allow the US Federal Reserve to slow the pace of its interest rate hikes
Stocks surged while the dollar dropped Tuesday as US inflation slowed more than expected, opening the way for the Federal Reserve to reduce the tempo of interest rate hikes.
US consumer prices rose at an annual pace of 7.1 percent in November, down from 7.7 percent in October, according to Labor Department data.
The consumer price index (CPI) is a closely-watched measure of inflation and was forecast by analysts to come in at 7.3 percent.
The bigger-than-expected drop should come as a relief to monetary policymakers after wholesale inflation proved hotter than expected last week.
“The key takeaway from the report at first blush is that overall inflation is cooling and that the Fed should be convinced to temper the pace of its rate hikes and perhaps place a lower ceiling on its terminal rate,” said market analyst Patrick O’Hare at Briefing.com.
The central bank is widely expected to lift interest rates 50 basis points Wednesday — a slowdown from the previous four 75-point hikes.
Lower inflation and interest rates are positive for businesses, and stock prices in Europe surged after the US inflation data was released.
While they later gave up part of those gains, London ended the day up 0.8 percent, Frankfurt 1.3 percent and Paris 1.4 percent.
Wall Street’s main indices jumped more than two percent at the opening bell, but gave up some of those gains as the morning wore on.
The Dow stood up 0.7 percent in late morning trading.
“In summary, Santa has delivered a nice enough package to the Fed, who can now celebrate the Christmas with more peace knowing that inflation is moving in the direction that they want with plenty of tail wind behind,” said Naeem Aslam, chief market analyst at Avatrade.
The prospect of the Fed slowing interest rate hikes was not positive for the US dollar, however, which lost more than one percent against its main rival currencies before cutting losses.
The weak dollar helped oil prices jump more than three percent, with Brent crude rising back above $80 per barrel.
Elsewhere, China’s shift away from its economically damaging zero-Covid policy continued to support sentiment as the world’s number two economy opens up.
Top Chinese officials are meeting this week to draw up their economic blueprint for re-emerging from Covid, with observers predicting more stimulus measures and pledges of support for the troubled property sector.
But there is also a worry among investors that the quick relaxation of containment measures such as mass testing and lockdowns might lead to a massive surge in infections that could overwhelm the healthcare system and weigh on the economy.
Still, the expected pick-up in demand in China boosted oil prices further, with both main contracts extending Monday’s strong gains.
“China’s reopening is coming, it won’t happen overnight, but it will provide a major boost to demand in the outlook next quarter,” said OANDA’s Edward Moya.
Ahead of the Wall Street open, United Airlines unveiled an order of 100 new Boeing 787 Dreamliners with options for an additional 100 jets.
Shares in Boeing climbed 0.9 percent, but United Airlines tumbled 5.7 percent.
And the US Securities and Exchange Commission charged disgraced cryptocurrency tycoon Sam Bankman-Fried with defrauding customers of billions of dollars.
– Key figures around 1630 GMT –
New York – Dow: UP 0.7 percent at 34,235.03 points
EURO STOXX 50: UP 1.7 percent at 3,986.83
London – FTSE 100: UP 0.8 percent at 7,502.89 (close)
Frankfurt – DAX: UP 1.3 percent at 14,497.89 (close)
Paris – CAC 40: UP 1.4 percent at 6,744.98 (close)
Tokyo – Nikkei 225: UP 0.4 percent at 27,954.85 (close)
Hong Kong – Hang Seng Index: UP 0.7 percent at 19,596.20 (close)
Shanghai – Composite: DOWN 0.1 percent at 3,176.33 (close)
Euro/dollar: UP at $1.0658 from $1.0539 on Monday
Dollar/yen: DOWN at 134.96 yen from 137.66 yen
Pound/dollar: UP at $1.2392 from $1.2268
Euro/pound: UP at 86.05 pence from 85.78 pence
Brent North Sea crude: UP 3.6 percent at $80.76 per barrel
West Texas Intermediate: UP 3.4 percent at $75.66 per barrel
burs-rl/bp
