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Hopes for Less Aggressive Fed Grow As U.S. Inflation Slows in December

Market Watch – January 13, 2023

February 14, 2023

U.S. stocks pared some of their early Monday gains, with investors still unsure about the Fed’s future path of rate hikes. The S&P 500 ended flat, the Dow fell 113 points, while the tech-focused Nasdaq gained 66. The TSX rose on Monday to its highest closing level in nearly four weeks, up 42 points, as investors went bargain shopping.

On Tuesday the World Bank cut its growth forecast for the global economy in 2023 as inflation has elevated the risk for a worldwide recession. The bank expects global growth to slow to 1.7% in 2023, down from its estimate of 3% growth in June. U.S. stocks took the news in stride, with all three major U.S. indexes registering modest gains. In Canada, the TSX added another 42 points in Tuesday’s session.

It was an even stronger session for U.S. stocks on Wednesday, as investor optimism grew that Thursday’s inflation data would lead to a less hawkish path for the Fed. The S&P 500 gained 50 points, the Dow added 269, while the Nasdaq jumped 189 points. The TSX rose 126 points, buoyed by a strong performance in the real estate sector.

Thursday’s U.S. inflation data showed that U.S. inflation fell to 6.5% in December year over year, down from 7.1% in November and well below the 9.1% peak seen in June. Meanwhile, Core CPI, which strips out food and energy prices, climbed 5.7% in December, down from November’s 6% gain. Thursday’s Labor Department data has raised expectations that the Fed will opt for a smaller 25-basis-point hike in February.

The latest U.S. inflation numbers helped North American markets to solid gains on Thursday, with the energy sector posting a strong performance. By Thursday’s close, the Dow was up 216 points, the S&P 500 added 13, and the Nasdaq rose 69 points. In Canada, the TSX kept marching higher, posting a gain of 186 points. Finally, investors snapped up U.S. Treasurys, lifting bond prices and weighing on U.S. 10-year yields, which declined to 3.48% on Thursday.

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