US stocks tick upwards as core inflation edges higher

Wall Street stocks rose on Friday after the Federal Reserve’s preferred measure of inflation inched higher in line with expectations, while consumer spending declined for the second consecutive month.

Wall Street’s benchmark S&P 500 added 0.4 per cent and the tech-heavy Nasdaq Composite gained 0.7 per cent.

Shares in Intel fell 7.5 per cent after the chipmaker said revenue in the current quarter was forecast to come in about $3bn below analysts’ expectations. Oil major Chevron slipped 4 per cent despite announcing record earnings for 2022, dragged lower by cooling fourth-quarter profits, while credit card company American Express jumped by a tenth after it reported a 25 per cent jump in full-year revenue to a record of almost $52.9bn.

Line chart showing semiconductor stocks have climbed in 2023

The moves in equity markets came as December’s core personal consumption index, which omits energy and food inflation, increased 0.3 per cent as expected after rising 0.2 per cent month on month in November. Yet real consumer spending fell 0.3 per cent following a 0.2 per cent decline the previous month. Paul Ashworth, Capital Economics’ chief North America economist, said this suggested the US was “on the precipice of a recession and may already have fallen off the ledge”.

Although still near a multi-decade high, headline US inflation fell to its lowest level in more than a year in December. Yet Fed chair Jay Powell has insisted core inflation “often gives a more accurate indicator of where overall inflation is headed”.

US government bonds remained under pressure, with the yield on the 10-year US Treasury 0.04 percentage points higher at 3.53 per cent after the inflation figures were published. Bond yields move inversely to prices.

US equities had rallied on Thursday after gross domestic product for the fourth quarter of 2022 came in ahead of projections, rising at an annualised pace of 2.9 per cent. That was above the 2.6 per cent economists had forecast, marking a milder slowdown from 3.2 per cent in the previous quarter.

“With inflation well above target, this fully justifies ongoing interest rate increases from the Federal Reserve,” said James Knightley, chief international economist at ING.

“Dig a little deeper,” however, and it seemed “we have good growth but not for great reasons”, Knightley added. Consumer spending rose less than expected, residential investment fell sharply and non-residential fixed investment, “basically business capex”, grew just 0.7 per cent.

Instead, much of the rise in GDP reflected “increasingly involuntary” inventory building by mining, construction and manufacturing groups as consumer demand continued to soften, he said.

Investors firmly expect the Fed to raise rates by a quarter percentage point next week, marking a slowdown from the 0.5 percentage point move implemented in December. Powell’s forward guidance and the language he adopts during a press conference after the rate decision is announced are therefore likely to be the focus of attention.

A measure of the dollar’s strength against a basket of six currencies was up 0.2 per cent on Friday, while prices for Brent crude, the international oil benchmark, fell 1 per cent to $86.54 a barrel, erasing earlier gains.

In Asia, Hong Kong’s Hang Seng index rose 0.5 per cent, Japan’s benchmark Nikkei 225 increased almost 0.1 per cent and South Korea’s Kospi gained 0.7 per cent. Markets in China are closed for the lunar new year holiday.

Europe’s region-wide Stoxx 600 closed 0.3 per cent higher, Germany’s Dax gained 0.1 per cent and London’s FTSE 100 added 0.05 per cent.

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