AFP

Caution reigned on stock markets on Wednesday ahead of an expected interest rate hike from the Federal Reserve as inflation remains at decade-high levels despite moderate slowdowns. 

Wall Street’s main indices posted modest gains in morning trading, with the Dow adding 0.7 percent.

European stocks finished moderately lower, with London losses cushioned by news that UK inflation nudged lower in November.

Meanwhile, Frankfurt and Paris also fell despite the Ifo research institute’s forecast that Germany’s recession could be milder than previously predicted.

Asian stocks rose following Tuesday’s rebound on Wall Street.

The dollar drifted lower against its main rival currencies.

The Fed is forecast to increase borrowing costs 50 basis points Wednesday after four 75-point rises in a row.

The US central bank has embarked on an all-out campaign to cool demand in the world’s biggest economy, raising rates six times this year with interest-sensitive sectors like housing already reeling from tightening policy.

The US central bank’s post-meeting statement and boss Jerome Powell’s comments are the main focus for traders, along with the Fed’s infamous “dot plot” chart of the rate outlook.

“At the end of the day, it’s Jerome Powell, and the Fed, who will either give a green light for a modest Santa rally (for equities), or tell investors that Santa is stuck in a snow storm this year,” noted SwissQuote analyst Ipek Ozkardeskaya.

Investors will be looking for indications on the pace of future rate hikes, as well as what could be the “terminal rate”, or the highest interest rate before the Fed begins lowering rates again.

Briefing.com analyst Patrick O’Hare said the “tone and cadence from Fed Chair Powell will have an outsized impact today” on markets as official forecasts are subject to revision.

Later, the impact of higher interest rates on consumers and the wider economy will feed into investors’ calculations.

“That reality will be an inevitable drag on economic activity and it will be incorporated in the market’s concerns about the long and variable lags of monetary policy on economic activity,” he added.

It’s the turn of Europe on Thursday, with the Bank of England and European Central Bank expected to announce less aggressive rate hikes compared with their recent monetary policy decisions.

Wall Street rebounded Tuesday in reaction to data showing US consumer prices rose 7.1 percent last month, less than forecast and the slowest pace since December 2021.

The reading followed an October slowdown and fuelled hopes that inflation in the world’s biggest economy has finally peaked, after several months of Fed rate hikes.

Markets are also eyeing developments in China, which is continuing to roll back its strict zero-Covid strategy that has battered the world’s number two economy, though fears of a sharp surge in infections are causing some unease among dealers.

Oil prices pushed higher.

“Crude oil prices have continued their recent rise after the IEA warned that prices were likely to rise next year as sanctions further squeeze Russian supply, and demand starts to pick up as China starts to reopen properly,” said market analyst Michael Hewson at CMC Markets.

– Key figures around 1630 GMT –

New York – Dow: UP 0.7 percent at 34,350.80 points

EURO STOXX 50: DOWN 0.3 percent at 3,975.26

London – FTSE 100: DOWN less than 0.1 percent at 7,495.93 (close)

Frankfurt – DAX: DOWN 0.3 percent at 14,460.20 (close)

Paris – CAC 40: DOWN 0.2 percent at 6,730.79 (close)

Tokyo – Nikkei 225: UP 0.7 percent at 28,156.21 (close)

Hong Kong – Hang Seng Index: UP 0.4 percent at 19,673.45 (close)

Shanghai – Composite: FLAT at 3,176.53 (close)

Euro/dollar: UP at $1.0660 from $1.0635 on Tuesday

Dollar/yen: DOWN at 134.76 yen from 135.59 yen

Pound/dollar: UP at $1.2421 from $1.2366

Euro/pound: DOWN at 85.83 pence from 85.96 pence

Brent North Sea crude: UP 2.5 percent at $82.72 per barrel

West Texas Intermediate: UP 2.6 percent at $77.36 per barrel

burs-rl/lc

French prosecutors said Wednesday that they had searched the headquarters of President Emmanuel Macron’s Renaissance party in their investigation into the use of consulting firms by the government since 2017.

The Paris offices of US consulting giant McKinsey were also searched on Tuesday, the National Financial Prosecutors’ Office said, confirming a report in Le Parisien newspaper.

The use of consultants by Macron’s governments came under the spotlight in March after a French Senate inquiry concluded that public spending on them had more than doubled from 2018 to 2021, during Macron’s first term.

“It’s normal for the judiciary to investigate freely and independently to shed all the light on this subject,” a Renaissance spokesman, Loic Signor, told AFP.

He said the party remained at prosecutors’ disposal “to provide all useful information on the campaigns”.

McKinsey also confirmed the search of its offices, saying it was “cooperating fully with the authorities”.

Two probes have been underway since October, looking into possible false election campaign accounting, as well as possible favouritism and conspiracy.

Some McKinsey consultants are known to have worked as unpaid volunteers on Macron’s victorious 2017 election campaign and prosecutors are thought to be probing whether this entailed a hidden campaign expense.

They are also looking into whether the firm enjoyed special access and treatment afterwards when winning lucrative contracts with the government.

Finance Minister Bruno Le Maire acknowledged last month that there had been “excesses” with the use of consulting contracts in the past, but they had since been “corrected”.

– ‘McKinseygate’ –

Total outlays on consulting firms reached more than a billion euros ($1.1 billion) last year, according to the Senate panel report, a figure frequently cited by Macron’s opponents during his successful bid for a second term last April.

The panel also criticised fiscal strategies by McKinsey that it said allowed the US firm to pay no corporate taxes in France between 2011 and 2020.

That claim prompted the financial prosecutor’s office to open a separate preliminary investigation that led to a search of McKinsey’s Paris headquarters on May 24.

The prosecutors have not publicly identified the president or his campaign teams as the targets of the inquiry, of which Macron said in November that “I’m not scared of anything.”

But the use of expensive foreign firms for strategic advice, dubbed “McKinseygate” by national media, shocked many French voters even as Macron has repeatedly defended the contracts.

“When you want to go very quickly and very strongly with a policy, you need to make use of outside contractors occasionally,” he told reporters in March.

If prosecutors want to question Macron directly on the consulting claims, they may have to wait until he no longer enjoys presidential immunity in 2027, when he leaves office after the constitutional limit of two five-year terms.

France’s state auditor, the Cour des Comptes, has also found that several contracts for consulting firms during the Covid-19 crisis were awarded under “problematic” circumstances, Le Monde newspaper reported Monday, citing a confidential report.

France has strict rules on the financing of election campaigns and political parties, which have led to several convictions in recent decades.

Former president Nicolas Sarkozy received a one-year prison sentence in September 2021 for illegal financing of his 2012 re-election bid.

Judges concluded that Sarkozy spent nearly twice the legal limit on his doomed quest for a second term. He has appealed the ruling.

Caution reigned on stock markets on Wednesday ahead of an expected interest rate hike from the Federal Reserve as inflation remains at decade-high levels despite moderate slowdowns. 

Wall Street opened mixed, with the Dow adding 0.2 percent.

European stocks were moderately lower in afternoon trade, with London losses cushioned by news that UK inflation nudged lower in November.

Meanwhile, Frankfurt and Paris also fell despite the Ifo research institute’s forecast that Germany’s recession could be milder than previously predicted.

Asian stocks rose following Tuesday’s rebound on Wall Street.

The dollar drifted lower against its main rival currencies.

The Fed is forecast to increase borrowing costs 50 basis points Wednesday after four 75-point rises in a row.

The US central bank’s post-meeting statement and boss Jerome Powell’s comments are the main focus for traders, along with the Fed’s infamous “dot plot” chart of the rate outlook.

“At the end of the day, it’s Jerome Powell, and the Fed, who will either give a green light for a modest Santa rally (for equities), or tell investors that Santa is stuck in a snow storm this year,” noted SwissQuote analyst Ipek Ozkardeskaya.

Investors will be looking for indications on the pace of future rate hikes, as well as what could be the “terminal rate”, or the highest interest rate before the Fed begins lowering rates again.

Briefing.com analyst Patrick O’Hare said the “tone and cadence from Fed Chair Powell will have an outsized impact today” on markets as official forecasts are subject to revision.

Later, the impact of higher interest rates on consumers and the wider economy will feed into investors’ calculations.

“That reality will be an inevitable drag on economic activity and it will be incorporated in the market’s concerns about the long and variable lags of monetary policy on economic activity,” he added.

It’s the turn of Europe on Thursday, with the Bank of England and European Central Bank expected to announce less aggressive rate hikes compared with their recent monetary policy decisions.

Wall Street rebounded Tuesday in reaction to data showing US consumer prices rose 7.1 percent last month, less than forecast and the slowest pace since December 2021.

The reading followed an October slowdown and fuelled hopes that inflation in the world’s biggest economy has finally peaked, after several months of Fed rate hikes.

Markets are also eyeing developments in China, which is continuing to roll back its strict zero-Covid strategy that has battered the world’s number two economy, though fears of a sharp surge in infections are causing some unease among dealers.

Oil extended recent gains as traders awaited the weekly US inventories report for clues on demand in the world’s top crude consuming nation.

– Key figures around 1430 GMT –

London – FTSE 100: DOWN less than 0.1 percent at 7,498.46 points

Frankfurt – DAX: DOWN 0.5 percent at 14,424.85

Paris – CAC 40: DOWN 0.3 percent at 6,723.43

EURO STOXX 50: DOWN 0.4 percent at 3,972.18

New York – Dow: UP 0.2 percent at 34,165.75

Tokyo – Nikkei 225: UP 0.7 percent at 28,156.21 (close)

Hong Kong – Hang Seng Index: UP 0.4 percent at 19,673.45 (close)

Shanghai – Composite: FLAT at 3,176.53 (close)

Euro/dollar: UP at $1.0641 from $1.0635 on Tuesday

Dollar/yen: DOWN at 134.98 yen from 135.59 yen

Pound/dollar: UP at $1.2367 from $1.2366

Euro/pound: UP at 86.03 pence from 85.96 pence

Brent North Sea crude: UP 1.6 percent at $81.98 per barrel

West Texas Intermediate: UP 1.8 percent at $76.78 per barrel

burs-rl/lc

US central bankers opened the second day of a key policy meeting Wednesday, with growing anticipation of a smaller hike to the Fed’s benchmark lending rate as surging inflation shows signs of easing.

The Federal Reserve has embarked on an all-out campaign to cool demand in the world’s biggest economy, raising rates six times this year with interest-sensitive sectors like housing already reeling from tightening policy.

While it takes time for effects to ripple through sectors, there have been positive signs, with consumer inflation in the United States easing in November, according to government data released Tuesday.

The consumer price index, a key gauge of inflation, logged its smallest annual increase in nearly a year, fueling optimism that the Fed could soon moderate its efforts.

The figures nudged Wall Street stocks up, with Asian indices rising Wednesday as well, as all eyes turn to the Fed’s post-meeting statement and Fed Chair Jerome Powell’s comments for hints on the path to come.

Households have been squeezed by red-hot prices, with conditions worsened by surging food and energy costs after Russia’s invasion of Ukraine, and fallout from China’s zero-Covid measures.

To make borrowing more expensive, the Fed has raised interest rates six times, including four bumper 0.75-point increases, bringing the rate to between 3.75 percent and four percent.

Analysts widely expect the Fed to adopt a smaller, half-point hike on Wednesday, with Ian Shepherdson of Pantheon Macroeconomics calling it a “a done deal.”

While this marks a step down from earlier 0.75-point increases, it would still be a steep jump.

Shepherdson cautioned that Powell is “in no hurry to say what markets want to hear.”

“(Powell) is unlikely to deviate from his clear line that the Fed will do whatever is necessary to squeeze out inflation, and that some pain will be necessary,” Shepherdson added in an analysis.

– ‘Not yet proof’ –

Recent easing in data is welcome news to policymakers, but this is “not yet proof that inflation has sustainably cooled to levels consistent with the inflation target,” cautioned economist Edoardo Campanella of UniCredit Bank in a note.

The Fed has a longer-term target of two percent, while consumer inflation jumped 7.1 percent year-on-year in November.

“The Fed will likely further slow the pace of rate hikes early next year to 25 basis points,” Campanella added.

“However, with the labor market still very tight… and with broad financial conditions easing, the Fed will likely say that their job is not done,” he said.

Neil Saunders, managing director of GlobalData, added that the Fed is taking a “hawkish view on inflation” and will likely conclude further tightening is needed, based on the continued strength of underlying demand in the economy.

“As much as this action may have the desired effect, it will cool the economy at a time when it is already under pressure heading into 2023,” said Saunders.

The Fed’s further rate hike will also mark “a new phase” in its tightening cycle, said Nationwide chief economist Kathy Bostjancic in a note Monday.

This comes as officials look to adjust policy now that it is “within the range considered restrictive.”

Financial markets will be watching for signals of how high rates might go, and “the path for rates beyond that peak,” she added.