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US stocks pare gains after Fed minutes signal continued tightening

US stocks pared gains on Wednesday after minutes from the Federal Reserve’s latest meeting showed officials wanted to see more evidence of cooling inflation and supported continuing raising interest rates in 2023.

Wall Street’s benchmark S&P 500 index gained 0.8 per cent and the technology heavy Nasdaq Composite added 0.7 per cent in a volatile trading session. Stock markets had been more than 1 per cent higher before the minutes were released.

Previous remarks by Fed chair Jay Powell that the US central bank would slow its pace of rate rises “was not an indication of any weakening of the committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path”, participants in the December meeting said, according to the minutes.

Investors also seized on economic data released on Wednesday that showed a contraction in US manufacturing activity in December, the second month in a row, bringing it to its lowest level since May 2020.

The report from the Institute for Supply Management also showed that a decline in prices paid by manufacturers accelerated last month.

“Nearly all the survey-based evidence now points to, at best, a complete stagnation in activity or, more likely, a shallow recession beginning soon,” said Paul Ashworth, chief North America economist at Capital Economics.

US job openings in November fell marginally on the previous month but exceeded forecasts, with nearly 10.5mn positions available, far more than the 10mn predicted by economists.

Line chart of ISM prices index  showing Fall in prices paid by US manufacturers accelerates

US government bonds rallied, with the yield on the 10-year Treasury falling 0.09 percentage points to 3.69 per cent. Bond prices rise as yields fall.

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In currencies, the US dollar fell 0.3 per cent against a basket of six currencies, while the pound surged 0.8 per cent against the dollar, and the euro gained 0.5 per cent against the greenback.

“Minutes from the Fed’s December meeting are doing the dollar no favours, with officials acknowledging growing downside risks,” said Karl Schamotta, chief market strategist at Corpay.

Schamotta added that slowing inflation in EU countries like Germany and falling gas prices are pushing up the pound and euro.

Warmer weather meant the benchmark European natural gas contract fell 10 per cent to hit €62.75 per megawatt hour — its lowest level since late 2021. Prices for Brent crude oil also fell sharply, dropping 4.3 per cent to settle at $77.84 a barrel.

In European equities, the regional Stoxx Europe 600 added 1.4 per cent, taking its gains for the week to more than 3 per cent. France’s Cac 40 and Germany’s Dax rose 2.3 per cent and 2.2 per cent, respectively, the biggest one-day gains since early November. London’s FTSE 100 added 0.4 per cent.

The moves higher come during a week in which French, German and Spanish inflation figures have undershot expectations, boosting hopes that price growth has peaked across the eurozone. Data out on Wednesday showed France’s harmonised index of consumer prices rose 6.7 per cent in the year to December, a slowdown from 7.1 per cent in November.

Investors cut their predictions for where the European Central Bank’s terminal policy rate might settle, with the market now expecting interest rates to peak at 3.3 per cent in July, down from 3.5 per cent.

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Some investors may be getting ahead of themselves, however. “The market likely continues to act too quickly to price in less aggressive policy action” from the ECB, analysts at Rabobank cautioned.

Asian equities also rose on Wednesday, with Hong Kong’s Hang Seng rising 3.2 per cent. The index has gained about 40 per cent since the start of November. China’s CSI 300 index of Shanghai- and Shenzhen-listed shares gained 0.1 per cent.


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