Global stock markets extended their new year gains this week thanks to a fresh fall in inflation in the United States.
The latest evidence that price rises are returning to more normal levels has raised hopes that central banks may be able to cut interest rates sooner than expected, providing a potential boost to economic growth.
Investors around the world are already braced for a slowdown caused by tighter monetary policy and soaring costs, but a prolonged and deep downturn may be avoided if policymakers feel able to reduce rates later in 2023. Markets have also been boosted by hopes that China’s reopening will provide a shot in the arm for a flagging global economy, as well as by resilient company earnings reports from the final three months of 2022.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 12 January 1.7% up for the week so far, with the S&P 500 advancing 2.3%. While this week’s inflation figure was in line with analysts’ expectations, at least one Federal Reserve member has signalled plans to vote for a smaller rate rise at its next meeting. However, the optimism could be stymied by developments in the US jobs market: new unemployment claims have fallen faster than expected, indicating a shortage of workers. As such, wage inflation could soon start to creep up, putting renewed pressure on company bottom lines as well as prices across the wider economy.
In the UK, the FTSE 100 closed on Thursday 0.8% up for the week, having touched a four-year high during Thursday’s session. The expectation that industrial production will increase in China this year has helped drive commodities prices higher, to the benefit of the numerous energy and natural resources stocks listed in London. There were also gains for the retail and construction sectors, both of which have struggled in recent months. Upbeat Christmas trading statements from a number of supermarkets and high-street stores were welcomed by investors. Meanwhile, the prospect of interest rates falling faster than previously expected provided a boost to housebuilders, which should benefit from lower mortgage costs among their customers.
In Frankfurt, the DAX index ended Thursday’s session up 2.6% for the week, while France’s CAC 40 gained 1.4%. European shares also gained from optimism around falling US inflation and the relaxation of international travel restrictions in China. Latest figures showed the eurozone unemployment rate remained at a record low despite the difficulties faced by many businesses in the region over the past 12 months.
In Asia, the Hang Seng index in Hong Kong rose 2.5% as its recent reopening-driven recovery continued. Inflation in China was reported as rising to 2%: while this is in line with central bank targets, policymakers are likely to make additional efforts this year to stimulate demand. Japan’s Nikkei 225 index of leading shares, meanwhile, advanced on the back of a possible relaxation of monetary policy in the US. Travel stocks declined after the Japanese government announced restrictions on visitors from China due to an increase in Covid-19 infections there.
Hong Kong Hang Seng
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 12 January 2023.