Stock indices rise on expectations of lower US inflation

Important inflation data will be released in the US today. Economists expect the Consumer Price Index to decline from 7.1% to 6.5% year-over-year in December. The December consumer price index reading will determine the pace at which the US Federal Reserve will continue to raise rates. Expectations of further signs of easing inflationary pressures will support a less hawkish Fed stance (0.25% hike at the next meeting). Conversely, if the data disappoints, especially in core inflation, then the US Fed may leave a high rate of growth in interest rates (increase by 0.50% at the next meeting).

Federal Reserve Bank of Boston President Susan Collins said yesterday that she is leaning toward supporting a 0.25% interest rate hike at the central bank’s next meeting on February 1st. According to Collins, moving to a smaller step away from a more aggressive rate hike would give officials more time to see how their actions affect the economy.

ECB spokesman De Kos said yesterday that the ECB would continue to raise interest rates at future meetings at a steady pace. This coincides with comments from other ECB officials. Analysts are currently forecasting 2 consecutive 0.5% hikes at the next ECB meetings. This is a green flag for the European currency, as the euro will benefit from a higher risk appetite on the back of the Chinese opening outlook and the Federal Reserve’s aggressive policy slowdown.

Oil jumped by 3% yesterday despite a large increase in US crude oil inventories. That’s because oil traders are betting on easing rate hikes due to lower inflation. Meanwhile, analysts at Goldman Sachs are predicting an oil price in 2023 above $100 a barrel. According to experts, a barrel of Brent oil could reach $110 by the third quarter if China and other Asian economies are fully open from the constraints associated with the coronavirus.

Asian markets were mostly up yesterday. Japan’s Nikkei 225 (JP225) gained 1.03%, China’s FTSE China A50 (CHA50) added 0.07%, Hong Kong’s Hang Seng (HK50) ended the day up 0.49%, India’s NIFTY 50 (IND50) decreased by 0.10%, and Australia’s S&P/ASX 200 (AU200) ended the day up 0.90%.

China has begun lifting its ban on Australian coal imports. This move is the first concrete step taken to improve relations between the countries. The fact that the decision is coming from China suggests that the country is looking for ways to mend relations with Western countries, relations with which have soured amid increased competition between the US and China. The resumption of coal imports from China boosts Australia’s main commodity sector. Before the unofficial ban, China was one of the largest markets for Australian coal.

China’s Consumer Price Index increased from 1.6% to 1.8% year-over-year. Consumer inflation, which reflects prices between factories and plants, decreased by 0.7% in December. The improved inflation data indicates that the removal of COVID-19 restrictions is indeed having a positive effect on China’s economy and may signal a larger economic recovery later this year. Business activity indicators also indicate a slight improvement in conditions, although the overall activity is still below average. But markets are concerned that rising infections could hinder a more significant near-term economic recovery.