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European stocks waver as investors brace for Fed’s economic projections

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European stocks and US futures slipped on Wednesday following a rally in the previous session, with the Federal Reserve poised to slow the pace of interest rate rises against a backdrop of cooling inflation.

The regional Stoxx Europe 600 fell 0.5 per cent in early trading while London’s FTSE 100 lost 0.3 per cent, despite UK inflation slowing to 10.7 per cent in November, down from 11.1 per cent in October.

Contracts tracking Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 both fell 0.1 per cent even after US consumer price inflation eased more than expected in November to its lowest level in almost a year.

US equities shot up in the hours immediately after the CPI figures were released but fizzled out later in the day as investors braced themselves for the Fed’s economic projections, which come out later on Wednesday. The S&P 500 ended the session 0.7 per cent higher.

“To what extent the [Federal Open Market Committee] focuses on the drop in inflation remains unclear but we suspect the message will be more about the length of time monetary policy will need to remain restrictive rather than on the timing of any pause in the tightening cycle,” said Derek Halpenny, head of research at MUFG.

Even so, a 0.5 percentage point rate rise on Wednesday would bring the Fed to within touching distance of the implied terminal rate of around 5 per cent, meaning a “pause” in increases may not be too far away. The central bank’s forecasts, meanwhile, would “likely show weaker growth over the period to 2025, higher unemployment and inflation possibly a little lower,” Halpenny added.

A measure of the dollar’s strength against a basket of six peers fell 1.1 per cent in the previous session but traded flat on Wednesday, with the currency having tumbled about 8 per cent since hitting a 20-year high in late September.

US government debt continued a rally that began on Tuesday, with the yield on the two-year Treasury, which is particularly sensitive to interest rate expectations, down 0.04 percentage points at 4.18 per cent. Yields fall as prices rise.

Asian stocks rose in line with those in the US, with Japan’s Topix adding 0.6 per cent, South Korea’s Kospi gaining 1.3 per cent and China’s CSI 300 up 0.2 per cent after dropping earlier. Hong Kong’s Hang Seng index gained 0.4 per cent.

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