US stocks pare gains after Fed minutes signal continued to tighten

U.S. stocks pared gains on Wednesday after minutes from the Federal Reserve’s latest meeting showed officials wanted to see more evidence of slowing inflation and backed continued interest rate hikes. in 2023.

Wall Street’s benchmark S&P 500 and technology-heavy Nasdaq composite indices both rose 0.3% in afternoon trade in New York. Stock markets had risen more than 1% before the release of the minutes.

Fed Chairman Jay Powell’s earlier remarks that the U.S. central bank would slow its pace of rate hikes “were not an indication of a weakening of the committee’s resolve to achieve its goal of price stability or of a judgment that inflation was already on a persistent downward path,” participants at the December meeting said, according to the minutes.

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

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

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

U.S. job openings in November fell slightly from the previous month, but beat forecasts, with nearly 10.5 million vacancies, well above the 10 million forecast by economists.

Line chart of the ISM price index showing the fall in prices paid by US manufacturers is accelerating

US government bonds rallied, with the 10-year Treasury yield falling 0.08 percentage point to 3.7%. Bond prices rise as yields fall.

In currencies, the US dollar fell 0.2% against a basket of six currencies, while the pound jumped 0.8% against the dollar and the euro gained 0.5% against the greenback.

“The Fed’s December meeting minutes do the dollar a disservice as officials recognize growing downside risks,” said Karl Schamotta, chief market strategist at Corpay.

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

Warmer weather caused the benchmark European natural gas contract to fall 10% to €62.75 per megawatt hour – its lowest level since late 2021. Brent crude oil prices also fell sharply, falling by 4.1% to $78.68 a barrel.

In European stocks, the regional Stoxx Europe 600 gained 1.4%, taking its gains for the week to over 3%. France’s Cac 40 and Germany’s Dax rose 2.3% and 2.2% respectively, the biggest one-day rises since early November. London’s FTSE 100 gained 0.4%.

The upside moves come in a week in which inflation figures in France, Germany and Spain came in below expectations, bolstering hopes that price growth has peaked in the eurozone. Data released on Wednesday showed France’s harmonized index of consumer prices rose 6.7% on the year to December, a slowdown from 7.1% in November.

Investors cut their forecasts for where the European Central Bank’s final key rate might settle, with the market now expecting interest rates to peak at 3.3% in July, versus 3.5%.

However, some investors can get ahead of themselves. “The market is likely continuing to move too quickly to accommodate less aggressive policy action” from the ECB, Rabobank analysts warned.

Asian stocks also rose on Wednesday, with Hong Kong’s Hang Seng up 3.2%. The index has gained around 40% since the beginning of November. China’s CSI 300 index of stocks listed in Shanghai and Shenzhen gained 0.1%.

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