European stocks rose and US futures fell on Monday, as investors focused on slowing inflation on both sides of the Atlantic with warnings from central bank officials that interest rates are likely to stay higher for longer than markets expected.
The regional Stoxx Europe 600 rose 0.3 percent, taking its gains for 2023 to 5.4 percent, while the FTSE 100 in London rose 0.2 percent, near an all-time high. US markets are closed due to the Martin Luther King Jr. holiday, after the S&P 500 index, the owner of blue-chip stocks on Wall Street, posted its biggest weekly gain in two months on Friday.
Equity markets were boosted by signs of slowing price growth in the US and Europe. US inflation fell to its lowest level in more than a year in December, while consumer prices in the euro area rose at an annualized rate of 9.2 percent, down from 10.1 percent in November.
However, officials at the US Federal Reserve and the European Central Bank argue that core inflation, which excludes volatile food and energy prices, remains too high to warrant a rate cut anytime soon.
Some investors are not convinced. “Depending on employment in January and February, a 25 basis point hike at the end of this month could be the last rally,” said Stephen Blitz, chief US economist at TS Lombard. “Look for rate cuts starting in the middle of the year.”
Interest rate markets are now pricing in the 90 percent chance that the Fed will raise rates by a quarter of a percentage point when it meets at the start of February, down from 0.5 percentage point moves in December and four 0.75 percentage point moves at previous meetings.
A measure of the dollar’s strength against a basket of six currencies rose 0.1 percent on Monday, although it has fallen about 8.6 percent in the past three months as the pace of interest rate hikes slowed.
The euro traded flat against the dollar at $1,082, having strengthened 10.1 percent over the past three months. The yen reached 128.36 yen against the dollar, near its highest level in more than seven months, as investors look ahead to a potentially pivotal meeting of the Bank of Japan later this week – the last under chairman Haruhiko Kuroda.
In Asia, Hong Kong’s Hang Seng has traded flat, although it is up 8 percent so far this year. China’s CSI 300 index of shares listed in Shanghai and Shenzhen rose 1.5 percent, bringing its gains in January to 6.4 percent. China’s National Bureau of Statistics will release on Tuesday what is likely to be the third consecutive disappointing estimate for quarterly expansion.
In commodities markets, European natural gas prices continued to slide, with next month’s Dutch Gas Futures TTF falling as much as 10.25 percent to €58.25 per MWh – the lowest level since September 2021, according to Refinitiv data.