European stocks tick higher on hopes of slower interest rate rises

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European stocks and US futures rose on Monday, as investors bet that cooling inflation on either side of the Atlantic will allow central banks to slow the pace at which they raise interest rates early this year.

The regional Stoxx Europe 600 climbed 0.4 per cent, adding to last week’s 4.2 per cent gain, while London’s FTSE 100 fell 0.1 per cent.

Germany’s Dax gained 0.3 per cent after production in the country’s manufacturing, energy and construction sectors increased 0.2 per cent between October and November, according to figures by Destatis, the German statistics office.

Contracts tracking Wall Street’s blue-chip S&P 500 and the tech-heavy Nasdaq 100 both rose 0.35 per cent ahead of the New York open.

US equities rose sharply on Friday after US government data showed employees’ average hourly earnings rose 4.6 per cent year on year on a seasonally adjusted basis in December, compared with 4.8 per cent the previous month, easing upward pressure on inflation. The world’s biggest economy added 223,000 jobs in the final month of 2022 — more than economists had expected but fewer than the 256,000 increase in November.

Federal Reserve officials would be “encouraged” by signs that wage growth is beginning to slow, said Mark Haefele, chief investment officer at UBS Global Wealth Management, though the labour market remains too “tight” for the central bank to pause its rate-rise cycle.

The Fed last year lifted interest rates from close to zero to between 4.25 per cent and 4.5 per cent.

Rates markets are pricing in a roughly 75 per cent chance that the Fed will lift rates by a quarter of a percentage point when it meets at the end of January, with US inflation data out on Thursday expected to show prices rose 6.6 per cent year on year in December — down from an increase of 7.1 per cent in November. That would mark the slowest pace since October 2021.

A measure of the dollar’s strength against a basket of six peers fell 0.18 per cent on Monday. The currency has weakened more than 8 per cent over the past three months as traders continue to bet that the Federal Reserve will raise rates at a slower clip in the first few months of 2023.

“The US economy remains resilient but on a downtrend,” said Florian Ielpo, head of macro at Lombard Odier Asset Management. Even so, slowing inflation in Europe and China’s relaxation of strict zero-Covid policies meant that for “most risk-on asset classes, the direction has been the same — globally up”, he added.

Eurozone inflation fell back into single digits in December, with data published late last week showing the headline rate hitting 9.2 per cent after annual price growth exceeded 10 per cent for the previous two months.

Figures out on Monday showed unemployment in the region fell to a 24-year low in November, however, adding to pressure on the European Central Bank to keep raising rates.

In Asia, Hong Kong’s Hang Seng index gained 1.9 per cent and China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks rose 0.8 per cent.

Oil prices ticked higher, meanwhile, with Brent crude, the international oil benchmark, rising 2.9 per cent to $80.85 per barrel on expectations of higher demand.

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