The past two weeks have seen a volatile market, with investors reacting to a mix of economic data and corporate earnings reports. Inflation data from the United States caused a decrease in Wall Street futures, while European stocks saw a slight increase. The decrease in inflation has increased the likelihood of a smaller interest rate increase when the Federal Reserve meets later this month.
The U.S. economy saw a decrease in inflation, which has been declining for the past six consecutive months and now stands at 6.5%, the lowest it has been in a year. This decrease in inflation has led the markets to believe that the Federal Reserve may slow the pace of its monetary tightening at its next meeting in three weeks. However, analysts at UBS Global Wealth Management have noted that due to the "tightness of the labour market" it is unlikely that rates will fall in the near future.
Stock Market Performance:
European stocks saw a slight increase, with the Stoxx Europe 600, London's FTSE 100, and Germany's Dax all seeing gains in midday trading. In contrast, contracts tracking Wall Street's blue-chip S&P 500 and tech-heavy Nasdaq 100 were down before the opening bell.
Federal Reserve Expectations:
The decrease in inflation has increased the likelihood of a smaller interest rate increase when the Federal Reserve meets later this month. Analysts at UBS Global Wealth Management have stated that "The Fed is getting closer to the end of the rate hiking cycle, which we believe is likely by the end of the first quarter." However, they also note that due to the "tightness of the labour market" it is unlikely that rates will fall in the near future.
Companies and Layoffs:
Despite the tight labour market, some companies such as Amazon, Meta, Twitter, and Goldman Sachs have begun to lay off workers. Additionally, figures from the Bureau of Labor Statistics have shown that average hourly earnings increased by less than expected in December.
Currency and Bond Market:
The measure of the dollar's strength against a basket of six other currencies fell by 0.2% on Friday, following a decline of 0.9% in the previous session. The dollar has lost almost 10% in value over the past three months. US government bonds continued to rally, with the yield on the two-year Treasury note falling by 0.02 percentage points to 4.11%, down from a peak of 4.7% in November. However, analysts at JPMorgan have noted that "Treasury yields tend to decline by 50 to 60 [basis points] on average once the Fed goes on hold, and with our final expected rate hike still over two months away, this rally seems somewhat premature."
In other equity markets, Hong Kong's Hang Seng index rose by 1% and China's CSI 300 index of Shanghai- and Shenzhen-listed shares increased by 1.4%. Data released on Friday also showed that China's exports saw a sharp decline of 9.9% on an annual basis in December in dollar terms, the largest fall in almost three years.
Overall, the past two weeks have seen a volatile market as investors react to a mix of economic data and corporate earnings reports. The decrease in inflation in the United States has led to uncertainty in the market as investors try to gauge the Federal Reserve's next move on monetary policy. Despite some companies beginning to lay off workers, the tight labour market and lack of a significant decrease in interest rates suggest that the market will continue to be volatile in the coming weeks.