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US stocks edge higher as investors await inflation data

U.S. stocks rose on Tuesday, even after Federal Reserve officials reiterated that interest rates are likely to remain above 5 percent for much of 2023.

Rising health care prices and cyclical consumer stocks helped Wall Street’s blue-chip S&P 500 gain 0.4 percent by mid-afternoon. The technology-heavy Nasdaq Composite rose 0.6 percent as investors on Monday shrugged off warnings from the presidents of the U.S. Federal Reserve’s San Francisco and Atlanta branches that high inflation meant interest rates would have to rise further.

Most Fed officials expect the Fed Funds rate to peak between 5 percent and 5.25 percent later this year, up from today̵[ads1]7;s level of between 4.25 percent and 4.5 percent. Much of the debate among investors now revolves around whether the central bank will raise borrowing costs by 0.5 percentage points or 0.25 percentage points when it meets at the end of this month.

The arguments for both moves depend largely on December’s consumer price index data, which will be published on Thursday. Market participants surveyed by Refinitiv expect prices to have risen 6.5 percent year-on-year in the last month of last year, down from an increase of 7.1 percent in November.

“A cool surprise will tilt expectations on the 25th [basis point] increase, then we get some equity upside, says Mike Zigmont, head of trading and research at Harvest Volatility Management. “Hot data will result in 50 [basis point] expectations and significant disadvantages. The market is not symmetrically prepared.”

Tuesday’s stock market moves came after the US National Federation of Independent Business’s Small Business Optimism index fell more than expected in December, suggesting the Fed’s aggressive monetary tightening campaign is weighing on economic activity.

Line chart of the NFIB Small Business Optimism Index showing Confidence in the US economy fell sharply in December

“Inflation and difficulty finding skilled labor remain the most problematic issues” for small businesses, said Joshua Shapiro, chief U.S. economist at MFR.

US Treasuries have risen since the start of the year on signs of slowing wage growth in the world’s largest economy – a critical measure of pressure on prices for Fed officials who insist their approach to monetary policy will be “completely data-driven”.

On Tuesday, however, the interest rate on the two-year government bond, which is sensitive to interest rate expectations, rose 0.05 percentage points to 4.25 percent.

The 10-year Treasury yield, seen as a proxy for borrowing costs around the world, added 0.1 percentage point to 3.62 percent. Bond yields move inversely to prices.

A measure of the dollar’s strength against a basket of six peers rose 0.2 percent on the day. The euro hovered around its highest levels against the dollar since June, at $1.074.

Elsewhere in the stock markets, Europe’s Stoxx 600 fell 0.6 percent, eating away at strong gains since early January, while London’s FTSE 100 fell 0.4 percent and Germany’s Dax lost 0.1 percent.

In Asia, Hong Kong’s Hang Seng index fell 0.3 percent and China’s CSI 300 index of Shanghai- and Shenzhen-listed shares rose 0.1 percent.

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