Global shares rally as US price inflation slows

Slowdown in inflation could give the Federal Reserve cover to start scaling back the size of its interest rate increases

The S&P 500 jumped as much as 2.8% and the tech-heavy Nasdaq 100 rose as much as 4% during the session, before paring gains after a key gauge of US consumer prices posted the smallest monthly advance in more than a year. 

Global shares climbed after a rally was sparked by an unexpectedly strong slowdown in US price growth last month, as attention turned to whether the US Federal Reserve will alter its aggressive approach to battling inflation.

The S&P 500 jumped as much as 2.8% and the tech-heavy Nasdaq 100 rose as much as 4% during the session, before paring gains after a key gauge of US consumer prices posted the smallest monthly advance in more than a year. 

The US central bank is largely expected to raise rates by half a percentage point later on Wednesday, slowing the pace of increases. Investors will focus on what officials are projecting for the future of the Fed funds rate and any commentary on how it views the policy path for its next meeting in February. 

The European Central Bank is also expected to raise rates by 50 basis points, rather than the 75 basis point hikes it delivered earlier in the year, when it meets on Thursday. 

The latest US inflation data validates the Fed’s projected move on Wednesday and sets the tone for future rate decisions. The markets have now trimmed their rate-hike wagers, with the odds now favouring a quarter-point hike at the Fed’s February meeting. 

The slowdown could give the Federal Reserve cover to start scaling back the size of its interest rate increases. 

"This month's report provides confirmation of October's step-down in inflation pressures and is welcome news for the Fed," Morgan Stanley strategists wrote in a note.

The "reduction in the pace of tightening to 50 [basis points] was already telegraphed, and with the downtrend in inflation becoming entrenched, the Federal Reserve can set its sights squarely on the labour market", the bank said. 

Some investors cautious

Still, some investors are approaching the inflation surprise cautiously.

“While the war against inflation is turning, we are a long way off declaring victory and the Fed will keep its hawkish stance for a while longer, even if it does potentially force a recession,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

The inflation-fuelled rally fails to recognise that corporate earnings are just starting to see the impact of tight monetary policy, James Athey, investment director at Abrdn.

“As the full effects of the Fed’s aggressive actions this year play out next year, it seems inevitable that we will see a significant repricing lower in EPS forecasts and thus the broad market,” Mr Athey said.  

Shares across the world joined in the US rally.  

“Global markets have received a welcome boost today, as the latest US inflation survey brought downside in both headline and core [inflation]  readings in November," said Joshua Mahony, senior market analyst at online broker IG.

"With 2023 approaching, today's outperformance for the Nasdaq does bring optimism that the tech sector will produce the greatest gains once disinflation allows the Fed to reverse course," he said. 

The pan-European Stoxx-600 index rose 2%. In Dublin, most shares rose, with international heavyweight CRH closing 1.5% higher and Smurfit Kappa up 3%. 

• Bloomberg, Reuters, Irish Examiner