European stocks and US futures were steady on Wednesday with the Federal Reserve poised to lift borrowing costs by a quarter percentage point in what would be the smallest increase in rates since last March.
The regional Stoxx Europe 600 traded 0.2 per cent higher after eurozone inflation fell more than expected to 8.5 per cent in January, down from 9.2 per cent in December. Economists polled by Reuters had forecast a decline to 9 per cent. Core inflation, which omits relatively volatile food and energy prices, remained at 5.2 per cent, with investors having expected a decline to 5.1 per cent. The euro traded 0.2 per cent higher against the dollar at $1.08.
Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 meanwhile slipped 0.4 per cent and 0.3 per cent respectively, ahead of the New York open.
Fed officials, gathered for their first policy meeting of the year, are later today expected to increase rates by 0.25 percentage points to a range of 4.5-4.75 per cent, the highest level since September 2007 at the start of the global financial crisis.
Having lifted rates in 0.5 percentage-point and 0.75 percentage-point increments since May, such a move would mark a shift to a more traditional pace of monetary tightening and reflects growing confidence that inflation is on a downward trajectory.
With a quarter percentage-point move all but nailed on, markets are likely to swing higher or lower on the language deployed by Fed chair Jay Powell in his press conference shortly after the rate increase is announced.
“We expect Powell’s comments will be quite hawkish in order to underscore that slowing is not stopping, and to discourage markets from expecting rate cuts in 2023,” said analysts at JPMorgan.
Wage and price inflation have slowed, initial jobless claims have declined and the unemployment rate and consumer spending are “rangebound”, the analysts continued. Yet despite a more “encouraging” economic outlook, Powell is expected to point yet again to the “historical costs of easing too soon”.
Indeed, Spain’s inflation rate rose 5.8 per cent in the year to January, up from 5.5 per cent in December, according to preliminary figures published by its national statistics office on Monday, and “served as another reminder that the assumptions of having already achieved this ‘immaculate disinflation’ glide-path will not be a one-way easy sailing trajectory in reality”, said Charlie McElligott, analyst at Nomura.
The Bank of England and European Central Bank are due to implement their own interest rate increases on Thursday, with both expected to opt for half percentage-point adjustments upwards.
In Asia, Hong Kong’s Hang Seng index added 1 per cent, China’s CSI 300 rose 0.9 per cent and South Korea’s Kospi gained 1.2 per cent. Japan’s Nikkei was steady.