European shares were higher and Wall Street futures were lower on Friday after US inflation eased further in December, raising the possibility of a smaller rate hike when the Federal Reserve meets later this month.
The regional Stoxx Europe 600 added 0.4 percent in midday trading, London’s FTSE 100 gained 0.5 percent and Germany’s Dax added 0.2 percent. Contracts tracking Wall Street’s blue-chip S&P 500 fell 0.4 percent, while those tracking the tech-heavy Nasdaq 100 shed 0.5 percent before the opening bell.
The move came after data on Thursday showed annual US inflation fell for a sixth straight month to 6.5 percent, the lowest consumer price index reading in a year. The spot rate market is pricing in a higher likelihood that the Fed will gradually ease monetary tightening at its next meeting in three weeks, with a 0.25 percentage point increase now expected to follow December’s half a percentage point increase.
“The Fed is approaching the end of its rate hiking cycle, which we believe may be at the end of the first quarter,” said analysts at UBS Global Wealth Management. Even so, “labor market fears” mean rates won’t fall, with US unemployment at a 50-year low, job vacancies rising and quit rates – “related to wage growth” – too high to justify what the Fed is calling a pivot when anyway.
Companies including Amazon, Meta, Twitter and Goldman Sachs have all started laying off workers, but figures from the Bureau of Labor Statistics show average hourly earnings rose less than expected in December.
A measure of the dollar’s strength against a basket of six other currencies fell 0.2 percent on Friday, after falling 0.9 percent in the previous session. The world’s de facto reserve currency has fallen by nearly 10 percent in the past three months.
US government bonds continued to rally, with yields on two-year Treasury notes, which are highly sensitive to interest rate expectations, falling 0.02 percentage points to 4.11 percent, down from a peak of 4.7 percent in November.
“Treasury yields tend to fall 50 to 60 percent [basis points] average if the Fed continues to hold, and with the last expected rate hike still more than two months away, this rally appears premature,” said analysts at JPMorgan.
Elsewhere in the equity market, Hong Kong’s Hang Seng index gained 1 percent and China’s CSI 300 index of Shanghai- and Shenzhen-based shares added 1.4 percent. Data released on Friday showed that China’s exports suffered the sharpest fall in almost three years in December, declining 9.9 percent on an annual basis in dollars.