Wall Street has Become Optimistic by Inflation Data and Fed Action

Dec 12 (Reuters) – In anticipation of the final round of transatlantic central bank interest rate hikes this year, investors took a favorable position, believing that the now-rapid rate of increases in borrowing costs will finally reduce. This led to advances in Wall Street stocks, oil prices, and U.S. Treasury yields.

The S&P 500 gained 1.4%, the Dow Jones Industrial Average roughly 1.6%, and the Nasdaq Composite nearly 1.25%. An approximately 3% increase in Microsoft Corp. shares due to the software maker’s plans to purchase a part in the London Stock Exchange Group helped boost the indexes.

Oil prices also increased after a multi-week slump as a significant crude pipeline feeding the U.S. closed, and Russia promised to reduce production, even as China’s relaxing economic policies. Restrictions under COVID-19 improved the forecast for gasoline demand.

The gains from 2021 were all lost when the MSCI all-country stock index increased by 0.55%, bringing its year-to-date loss to about 18%. In addition, as investors anticipated changes in interest rates, the STOXX index of 600 companies in Europe fell by approximately 0.5%.

In Asia, the MSCI’s broadest index of Asia-Pacific equities outside of Japan fell 1.3%, wiping off some of the gains made the week before on hopes that China’s economy will finally open up after its zero-COVID policy was abandoned. Nikkei in Japan fell 0.2%.

Central Bank Monitoring

The rate increases anticipated by economists for the Fed on Wednesday, the Bank of England, the European Central Bank, on Thursday will all be 50 basis points, down from the 75 basis point increases seen in recent sessions.

Central banks will start acting less aggressively this week, according to Patrick Spencer, vice chair of equity at Baird Investment Bank; however, Tuesday’s CPI data will be crucial.

“Employment generally is the key to recovery from a recession, and I believe it will be stronger than most people anticipate “, said Spencer.

In addition to the Fed’s new economic estimates and Fed Chair Jerome Powell’s press conference, the Fed is widely anticipated to hike interest by 50 basis points on Wednesday at its final meeting of 2022.

While essential for year-end trading ranges, the final chapter of this bear market is all about the trajectory of earnings projections, which are, in our opinion, much too high.

Dollar Weakness, Slight Rise in Yields

On Monday, in anticipation of the Fed’s upcoming announcement, U.S. Treasury yields modestly increased. The 10-year Treasury note yield and the 30-year bond yield increased by basis points, with the 10-year yield rising to 3.613% from 3.579%. Two-year yields increased by 5.8 basis points to 4.388%, as they normally do in tandem with predictions for interest rates.

In the currency markets, the dollar index was down marginally at $105.01, not far from the five-month low of $104.1 reached a week ago. At $1.0535, the euro likewise remained unchanged.

U.S. crude ended the day at $73.17 a barrel, up 3% from the day’s low of $67.17 per barrel for Brent crude futures.

As investors held off anticipating developments later in the week, gold prices declined. To $1,780.56 an ounce, spot gold price fell by 0.9%. U.S. gold futures dropped 1.10% to $1,778.30 per ounce.