Stocks hesitant as traders eye US inflation, rates

A report on December consumer inflation on Thursday will be closely watched to gauge how Fed Chairman Jerome Powell might respond at the central bank's next policy meeting. ©AFP

London (AFP) - Stock markets wavered Tuesday after Federal Reserve officials signalled that further interest rate hikes were likely to cool sky-high inflation, prompting investors to take a cautious stance after recent gains.

After a brutal 2022, equities worldwide have seen a strong start to the new year thanks largely to Beijing's decision to throw off the shackles of its strict zero-Covid policy, which battered the economy.

While there are concerns about the short-term fallout of soaring Covid infections across China, investors are increasingly confident in Beijing's pledges of government support, including for the troubled property sector.

But investors' focus has turned to the outlook for US interest rates as the Fed tries to curb soaring prices without plunging the world's largest economy into recession.

On Monday, San Francisco Fed boss Mary Daly said rates would likely go above five percent before the policy board decides to stop lifting.

Atlanta Fed president Raphael Bostic tipped a similar level, though he added that they would not be changed for "a long time".

That dashed hopes that recent data indicating a US economic pullback and contained wage growth would stay the Fed's hand for the foreseeable future.

A report on December consumer inflation on Thursday will be closely watched to gauge how Chairman Jerome Powell might respond at the Fed's next policy meeting toward the end of this month, with most investors still expecting a rate pause.

"There is a risk that Fed Chair Powell or economic data contradicts that view, which is why we are erring on the side of caution," said market analyst Fawad Razaqzada at the brokerage StoneX.

A warning by the World Bank on Tuesday that the global economy is slowing "perilously close" to recession also tempered recent optimism, as it slashed its global growth forecast for this year to just 1.7 percent, roughly half its prediction from last June.

European stock markets closed broadly lower, while Wall Street indices were little changed in morning deals after losses on Monday.

Markets are experiencing "a mild bout of profit taking after recent gains", said Richard Hunter, head of markets at Interactive Investor.