European stocks and US futures fell on Tuesday after Federal Reserve officials reiterated that interest rates would probably hover above 5 per cent for much of 2023, denting investor optimism ahead of the release of December’s US inflation data later this week.
The regional Stoxx Europe 600 shed 0.7 per cent in early trading, eating into strong gains since the beginning of January. London’s FTSE 100 fell 0.2 per cent and Germany’s Dax fell 0.5 per cent.
Contracts tracking Wall Street’s blue-chip S&P 500 and those tracking the tech-heavy Nasdaq 100 both dipped 0.3 per cent ahead of the New York open, and a day after presidents of the US central bank’s San Francisco and Atlanta branches reminded investors that high inflation meant interest rates had further to climb.
Most Fed officials expect the fed funds rate to peak between 5 per cent and 5.25 per cent later this year, up from its current level between 4.25 per cent and 4.5 per cent. Much of the debate among investors now revolves around whether the central bank will lift borrowing costs by 0.5 percentage points or 0.25 percentage points when it meets at the end of this month.
Arguments for either move depend to a large extent on December’s consumer price index data, which will be published on Thursday. Market participants surveyed by Refinitiv expect prices to have risen 6.6 per cent year on year in the final month of last year, down from an increase of 7.1 per cent in November.
“A cool surprise will tilt the expectations to a 25 [basis point] hike and we’ll get some equity upside,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “Hot data will result in 50 [basis point] expectations and significant downside. The market is not symmetrically primed.”
US government bonds have rallied since the start of the year on the back of signs of slowing wage growth in the world’s biggest economy — a key measure of pressure on prices for Fed officials who insist their approach to monetary policy will be “completely data-dependent”.
On Tuesday, however, the yield on the two-year Treasury note, which is sensitive to interest rate expectations, rose 0.04 percentage points to 4.24 per cent. Bond yields move inversely to prices.
A measure of the dollar’s strength against a basket of six peers gained 0.3 per cent on the day. The euro edged up to its highest level against the greenback since June, at $1.073.
In Asia, Hong Kong’s Hang Seng index fell 0.3 per cent and China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks added 0.1 per cent.