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Slowing inflation supports markets on eve of Fed decision

Consumer prices in the US slowed last month, data released on Tuesday showed, just one day before the US Federal Reserve (Fed) is expected to announce it will keep rates unchanged after ten consecutive rate hikes. Investors saw no indication of a change of course by the Fed in the latest US inflation data and stock markets subsequently recovered.

Shane Strowmatt, LGT
Reading time
5 minutes
US dollar bill
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US inflation came in at 4% year-on-year in May, its lowest level in more than two years. The Core Consumer Price Index - which strips out volatile food and energy prices - was up 5.3% when compared with the same month a year earlier. Both values were lower than in April. The slowing rate of price increases was interpreted by investors as sufficient for the Fed go ahead with a pause in its interest rate hiking cycle.

In New York, the positive sentiment from the start of the week carried over into Tuesday. The Dow Jones Industrial gained 0.43%, finishing the session at 34,212.12 points. The S&P 500 increased 0.69% to close at 4,369.01 points. The tech-heavy Nasdaq-100 once again beat the other major indices, closing the session up 0.79% at 14,900.85 points, its highest level since April 2022.

In Europe, consumer price growth in the continent’s largest economy was still high, but in line with expectations. Germany’s Consumer Price Index rose by 6.1% year-on-year in May, coming down from more than 7% in April, the Federal Statistics Office said. Lower energy prices were contributing to the falling pace of price increases, while food prices were the main driver of inflation. Also in Germany, a key indicator of investor confidence - the ZEW Indicator of Economic Sentiment - rose slightly to minus 8.5 points in June from minus 10.7 in the month before. The negative value means survey participants do not expect the economic situation in Germany to improve in the coming months. The low economic expectations in the bloc’s largest economy seem unlikely to influence the European Central Bank (ECB), which is largely expected to announce another 25-basis-point interest rate increase on Thursday. European markets mostly ended the day in positive territory with Germany’s DAX climbing 0.83% and the EuroStoxx 50 gaining 0.72% on Tuesday.

Elsewhere in Europe, Britain’s unemployment rate unexpectedly fell to 3.8% in April while wages increased by 7.2%. The strong labour market data may be a sign there is still strong inflation to come and that the Bank of England may not be ready to pause its hiking cycle, even after 12 interest rate increases in a row.

In the Asia-Pacific region, stocks were trading mixed on Wednesday ahead of the Fed decision. In Japan, the Nikkei 225 was once again leading gains, trading up 1.8%. South Korea’s Kospi fell 0.7% along with Hong Kong's Hang Seng Index, which was down 0.2%. In mainland China, the Shanghai Composite gained 0.2%, and the Shenzhen Component jumped 0.7%.

Corporate news in focus: BlackRock Investor Day, Caterpillar annual general meeting, Shell Capital Markets Day.

Economic data in focus: UK gross domestic product (08:00 CET), eurozone industrial production (11:00), US Producer Price Index (14:30), US interest rate decision (20:00).

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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