Indications that US inflation may be reaching a peak failed to keep stocks rallying

London (AFP) - US and European stocks failed to capitalise Thursday on optimism that US inflation may be finally peaking after soaring to its highest level in decades.

US consumer prices rose seven percent on-year in December, the fastest rate since 1982, as supply snarls and energy costs were compounded by surging demand from Americans returning to normal life.

However, Wednesday’s highly anticipated reading was in line with expectations and analysts pointed out that the increase from the previous month had slowed and was below forecasts.

There was a similar trend in the producer price index (PPI) released on Thursday.

Despite registering the largest calendar-year increase in a decade at 9.7 percent for 2021, producer prices rose just 0.2 percent in December on a monthly basis.

The data “brought forward the idea that this could be the point we see a peak in the inflation levels and light at the end of the long and dark inflation tunnel,” said Ipek Ozkardeskaya, senior analyst at Swissquote.

While European stocks mostly pushed into the green after the data and Wall Street opened higher, they later fell back.

In late morning trading on Wall Street, only the Dow was higher, climbing 0.5 percent.

In Europe, London rose 0.2 percent and Frankfurt added 0.1 percent, but Paris gave up 0.5 percent.

Interest rates and inflation “will keep investors on their toes”, said market analyst Craig Erlam, who added that “underlying anxiety in the markets… could make for some volatile price action for the foreseeable future”.

“It does seem that investors are on the edge of what they will tolerate and it won’t take much to push them over the edge,” he said.

There remains much debate on how many times the Federal Reserve will hike US interest rates to fight strong inflation and when it will begin to cut back on the holdings of bonds it purchased as part of its vast stimulus programme.

“The high level of inflation is a major factor behind the Fed’s increasingly hawkish stance, but should costs cool a little, the rhetoric surrounding rate hikes might dampen down,” said market analyst David Madden at Equiti Capital.

- Omicron fears -

Traders are fearful that markets will not have an easy ride this year as the Fed removes the massive support that has helped drive a two-year rally and saw the economy through the pandemic.

“There is a real risk that high levels of inflation could hurt consumer demand, which could weigh on economic activity, especially with Omicron spreading like wildfires,” said ThinkMarkets analyst Fawad Razaqzada.

“This in turn may mean the Fed will slow down or pause its hiking later this year.”

Meanwhile, other data released Thursday showed new claims for US unemployment benefits rose last week, in a potential indication of the drag from the latest Covid-19 surge.

Elsewhere, oil prices slid following gains Wednesday on data showing US crude stockpiles last week fell to the lowest level since 2018, lifting hopes for demand in the world’s top economy.

“OPEC being unable to hit output targets at a time when demand remains strong is ultimately keeping prices elevated and will continue to do so,” said Erlam.

- Key figures around 1630 GMT -

New York - DOW: UP 0.5 percent at 36,483.90

EURO STOXX 50: DOWN less than 0.1 percent at 4,315.24

London - FTSE 100: UP 0.2 percent at 7,563.85 (close)

Frankfurt - DAX: UP 0.1 percent at 16,031.59 (close)

Paris - CAC 40: DOWN 0.5 percent at 7,201.14 (close)

Tokyo - Nikkei 225: DOWN 1.0 percent at 28,517.94 (close)

Hong Kong - Hang Seng Index: UP 0.1 percent at 24,429.77 (close)

Shanghai - Composite: DOWN 1.2 percent at 3,555.26 (close)

Euro/dollar: UP at $1.1466 from $1.1451 late Wednesday

Pound/dollar: UP at $1.3739 from $1.3713

Euro/pound: UNCHANGED at 83.48 pence

Dollar/yen: DOWN at 114.06 yen from 114.53 yen

Brent North Sea crude: DOWN 0.2 percent at $84.50 per barrel

West Texas Intermediate: DOWN 0.4 percent at $82.32 per barrel