US stocks fell and Treasuries sold off on Friday despite inflation easing further in December, boosting the chances of a smaller interest rate rise when the Federal Reserve meets later this month.
Wall Street’s blue-chip S&P 500 fell 0.6 per cent at the opening bell in New York, while the tech-heavy Nasdaq 100 shed 0.7 per cent. Car stocks led the decline, with Ford off 6.9 per cent and General Motors down 6.2 per cent after Tesla said it would cut its prices in the US and Europe by a fifth. Tesla slid 6 per cent.
The moves came after equity markets rallied on Thursday on the back of data showing annual US inflation declined for the sixth consecutive month to 6.5 per cent, the lowest consumer price index reading in a year. Rates markets immediately priced in a higher probability that the Fed will slow the pace of its monetary tightening at its next meeting in three weeks, with a 0.25 percentage point rise now firmly expected to follow December’s half a percentage point increase.
“The Fed is getting closer to the end of the rate hiking cycle, which we believe is likely by the end of the first quarter,” said analysts at UBS Global Wealth Management. Even so, the “tightness of the labour market” means rates are unlikely to fall any time soon, with the US unemployment rate at a 50-year low, jobs vacancy rates elevated and the quit rate — “which is correlated with wage growth” — too high to justify a so-called Fed pivot any time soon.
However, figures from the Bureau of Labor Statistics show average hourly earnings rose by less than expected in December, while companies such as Amazon, Meta, Twitter and Goldman Sachs have begun job cuts.
US government bonds sold off on Friday, with the yield on the two-year Treasury note, which is particularly sensitive to interest rate expectations, rising 0.02 percentage points to 4.15 per cent, having peaked at 4.7 per cent in November.
“Treasury yields tend to decline by 50 to 60 [basis points] on average once the Fed goes on hold, and with our final expected rate hike still over two months away, this rally seems somewhat premature,” said analysts at JPMorgan.
Investors’ attention will now turn to fourth-quarter earnings season, which kicked off on Friday with a mixed set of results for some of America’s biggest finance groups. Year-on-year net income inched higher at Bank of America and JPMorgan, while Wells Fargo’s quarterly profit halved on the same period in 2021 and BlackRock reported a 15 per cent decline in revenues.
Analysts at FactSet noted that concerns in the market over a looming recession meant analysts last year lowered their earnings per share estimates for S&P 500 companies by 6.5 per cent for the fourth quarter, a larger margin than average.
Seema Shah, chief global strategist at Principal Asset Management, said even if inflation fell past 4 per cent late this year, permitting looser monetary policy, “markets will still be challenged due to earnings concerns”.
“If inflation plateaus there, then the Fed will have very little space to cut rates this year,” Shah added. “Not a great outcome, either way.”
A measure of the dollar’s strength against a basket of six other currencies gained 0.2 per cent on Friday, after declining 0.9 per cent in the previous session. The world’s de facto reserve currency has shed almost 10 per cent over the past three months.
Elsewhere in equity markets, Europe’s Stoxx 600 added 0.4 per cent, London’s FTSE 100 gained 0.7 per cent and Germany’s Dax added 0.3 per cent.
Hong Kong’s Hang Seng index gained 1 per cent and China’s CSI 300 index of Shanghai- and Shenzhen-listed shares added 1.4 per cent. Data released on Friday shows China’s exports suffered the sharpest fall in almost three years in December, declining 9.9 per cent on an annual basis in dollar terms.
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