Interactive Investor

Market snapshot: positive momentum ahead of key data

Two inflation readings have the potential to upset the investment apple cart, writes head of markets Richard Hunter.

12th December 2023 08:39

by Richard Hunter from interactive investor

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Wall Street finished higher once more, continuing the momentum which is fuelling hopes of a Santa rally until the year end.

Hurdles still remain which could derail sentiment, and many of those are due to be revealed this week. The Consumer Price Index reading is due later today, where it is expected that inflation will have continued to cool, while critically remaining in excess of the Federal Reserve’s target of 2%. At the headline level, the figure is expected to reduce to 3.1% from 3.2% in October, with core inflation steadying at 4%.

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The Producer Price Index reading will follow tomorrow, revealing the path of inflation at the wholesale level, which is also expected to show a further easing. Either of these inflation readings have the potential to upset the investment apple cart, with any unexpected strength in the numbers likely to add to the debate of when the Fed will begin to consider lowering rates next year. The current consensus points towards the first cut coming in May, but this is likely to fluctuate depending on the economic data.

Indeed, the Fed’s latest rate decision is also due tomorrow, with the market long having priced in a no-change decision. Of rather more interest will be the accompanying comments, where the Fed’s latest thinking will be revealed. It seems unlikely that any radical change of direction will be forthcoming, with the Fed increasingly erring on the side of caution in ensuring that inflation is finally tamed, while ideally also avoiding a technical recession given the pace of rate hikes so far.

Leading into these important couple of days, the main indices have continued their recent march, with the S&P 500 closing at its highest level since March 2022 and the Dow Jones since January 2022. In the year to date, the S&P 500 has added 20.4%, the Dow Jones 9.8%, while the Nasdaq remains the star performer with a rise of 38%.

Asian markets also ground higher, buoyed in part by optimism ahead of the crucial US economic data releases. In addition, the release of wholesale prices in Japan showed a rise of 0.3%, the lowest rate of growth in nearly three years. As such, the debate remains ongoing as to whether the Bank of Japan will need to relax its loose monetary policy, with the latest figure showing a moderation which could lead to the status quo being maintained. In China, there were reports that the current economic conference will conclude that any recovery needs more stimulus, with the hope being that there will be some concrete proposals to energise the ailing growth in the region.

The optimistic baton was also passed on to UK markets, which moved ahead briskly at the open. Hopes of a stimulus in China boosted the mining sector, as well as providing a lift for Burberry Group (LSE:BRBY) shares. Gains were tempered by weakness in the telecoms sector, however, where news of a proposed Ofcom ban on inflation-linked contract rises hit BT Group (LSE:BT.A) shares in particular. It remains to be seen whether any Santa rally will reach UK shores this year, with the early indications being that any year-end strength could this year pass the UK by. In the meantime, the FTSE 100 is up by 1.6% this year, some way off its February highs.

At a domestic level, UK pay growth came in slightly lower than expected at 7.3% and below the previous number of 7.8%. The number of job openings also dropped, implying that the Bank of England’s interest-rate hiking policy could be starting to show some signs of gaining traction. However, pay rises of themselves are also inflationary, which keeps the balance in play and, by extension, reduces the likelihood of any rate cuts in the short to medium term. Even so, economic data most recently has been better than feared, which has prompted something of a recovery in the FTSE 250, with the index improving to stand down by just 0.4% so far this year.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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