Wall Street steady ahead of inflation data, Fed action

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Global stocks, U.S. Treasury yields and the dollar were steady on Monday as investors awaited the last round of transatlantic central bank interest rate hikes this year, hoping that the now-hefty pace of increases in borrowing costs will finally show signs of easing.

U.S. stocks gained some ground as of midday, with the Dow Jones Industrial Average up 0.76%, the S&P 500 up 0.45%, and the Nasdaq Composite up 0.2%.

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After a multi-week decline, oil prices jumped as a key pipeline supplying the United States closed and Russia threatened a production cut even as China’s loosening COVID-19 restrictions bolstered the fuel demand outlook.

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The dollar edged up as data last week – that showed U.S. wholesale inflation rose more than expected last month – reinforced the view the Federal Reserve may have to keep interest rates higher for longer.

The U.S. consumer price index (CPI) for November is due on Tuesday, when a slowdown in core annual inflation is anticipated.

“A heavy event risk calendar this week stands to define the core themes for 2023,” ING bank said.

Market consensus was still “underappreciating” the risk of inflation staying higher longer, and “dangerously second-guessing” the Fed in terms of rate cuts in the second half of next year, ING said.

The MSCI all country stock index was virtually flat on the day, still down 18% so far this year, wiping out all gains chalked up in 2021.

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In Europe, the STOXX index of 600 companies was down about 0.4% as investors awaited interest rate moves.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan slid 1.4%, erasing almost all of the previous week’s gains stemming from optimism that China is finally opening up its economy with the dismantling of its zero-COVID policy. Japan’s Nikkei eased 0.2%.

CENTRAL BANK WATCH

Economists expect the Federal Reserve on Wednesday, and the European Central Bank and Bank of England on Thursday, to all raise rates by 50 basis points – slowing down from the 75 basis point hikes seen in recent meetings.

Patrick Spencer, vice chair of equities at Baird investment bank, said central banks will start taking a less aggressive stance this week, though Tuesday’s CPI data will be critical.

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“It’s the last important week of the year, after this week you’ve got no real sort of catalysts. If the CPI is a muted number, we’re off to the races and we’ll get our year-end rally,” Spencer said.

But irrespective of the CPI, deflationary pressures are increasing, with crude oil prices down for the year, and iron ore, lumber and house prices also down, Spencer said.

“All this talk of recession, I think it is certainly in the price, it’s in the markets. The key about recession is generally employment, and I think employment is going to be stronger than people give it credit,” Spencer said.

While the Fed is widely expected to raise rates by 50 basis points on Wednesday at its last meeting of 2022, the focus will also be on the central bank’s updated economic projections and Fed Chair Jerome Powell’s press conference.

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“This week’s focus is likely to be centered on CPI and the Fed. To us, that is yesterday’s news,” Morgan Stanley market strategists wrote in a note on Monday.

“While it’s important for … year-end trading ranges, the final chapter to this bear market is all about the path of earnings estimates, which are far too high, in our view.”

DOLLAR, BONDS FLAT

In currency markets, the dollar index ticked down 0.067% to $104.98, not far from the five-month trough of $104.1 hit a week ago. The euro was up 0.1% on Monday to $1.0541.

Treasury yields were flat. The yield on 10-year Treasury notes was up just 2.6 basis points at 3.593% and the yield on 30-year bonds was up 2 basis points at 3.57%. Two-year yields, which typically move in step with interest rate expectations, rose 5.2 basis points to 4.382%.

U.S. crude jumped 2.94% to $73.11 per barrel and Brent was at $77.91, up 2.38% on the day.

Gold prices edged lower. Spot gold dropped 0.7% to $1,783.83 an ounce. U.S. gold futures fell 0.52% to $1,788.70 an ounce.

(Reporting by Lawrence Delevingne in Boston and Huw Jones in London, Editing by Nick Macfie and Mark Potter)