US stocks notch largest weekly gains in two months

US stocks notched their largest weekly gains in two months as earnings season kicked off and traders took economic indicators showing easing inflation as a sign that the Federal Reserve would not have to be as aggressive in raising interest rates this year.

Wall Street’s blue-chip S&P 500 rose 0.4 per cent on Friday, taking the weekly gain to 2.7 per cent. The Nasdaq Composite climbed 0.7 per cent, taking gains over the past five sessions to 4.8 per cent.

The indices had their largest weekly advances since mid-November, and notched back-to-back weekly gains following four weeks of consecutive losses.

The week’s rally was driven by data that showed annual US inflation declined for the sixth consecutive month to 6.5 per cent, the lowest consumer price index reading in more than a year. Signs of slowing price growth built on momentum from last week, when figures from the Bureau of Labor Statistics showed average hourly earnings rose by less than expected in December, while companies such as Amazon, Meta, Twitter and Goldman Sachs have begun job cuts.

Rates markets priced in a higher probability that the Fed will slow the pace of its monetary tightening at its next meeting in February, with a 0.25 percentage point rise firmly expected to follow December’s half a percentage point increase.

“The Fed is getting closer to the end of the rate hiking cycle, which we believe is likely by the end of the first quarter,” said analysts at UBS Global Wealth Management. Even so, the “tightness of the labour market” means rates are unlikely to fall any time soon, with the US unemployment rate at a 50-year low, jobs vacancy rates elevated and the quit rate — “which is correlated with wage growth” — too high to justify a so-called Fed pivot any time soon.

Investors are beginning to turn their attention to earnings season, which stepped up a gear Friday with a mixed set of results for some of America’s biggest finance groups. Year-on-year net income inched higher at Bank of America and JPMorgan, while Wells Fargo’s quarterly profit halved from a year ago primarily due to a hit from multibillion-dollar fines. Asset manager BlackRock reported a 15 per cent decline in revenues.

Although investors are weighing the medium-term outlook for the sector against debate about a potential recession this year, lenders have broadly benefited from the Federal Reserve’s aggressive campaign to raise interest rates.

Concerns in the market over a looming recession meant analysts last year lowered their earnings per share estimates for S&P 500 companies by 6.5 per cent for the fourth quarter, a larger margin than average, according to FactSet.

US government bonds sold off on Friday, with the yield on the two-year Treasury note, which is particularly sensitive to interest rate expectations, rising 0.1 percentage points to 4.23 per cent, having peaked at 4.7 per cent in November.

“Treasury yields tend to decline by 50 to 60 [basis points] on average once the Fed goes on hold, and with our final expected rate hike still over two months away, this rally seems somewhat premature,” said analysts at JPMorgan.

Seema Shah, chief global strategist at Principal Asset Management, said even if inflation fell past 4 per cent late this year, permitting looser monetary policy, “markets will still be challenged due to earnings concerns”.

“If inflation plateaus there, then the Fed will have very little space to cut rates this year,” Shah added. “Not a great outcome, either way.”

A measure of the dollar’s strength against a basket of six other currencies was 0.1 per cent lower on Friday, after declining 0.9 per cent in the previous session. The world’s de facto reserve currency has shed almost 10 per cent over the past three months.

Elsewhere in equity markets, Europe’s Stoxx 600 added 0.5 per cent, London’s FTSE 100 gained 0.6 per cent to nudge closer to an all-time high and Germany’s Dax added 0.2 per cent.

Hong Kong’s Hang Seng index gained 1 per cent and China’s CSI 300 index of Shanghai and Shenzhen-listed shares added 1.4 per cent. Data released on Friday showed China’s exports suffered the sharpest fall in almost three years in December, declining 9.9 per cent on an annual basis in dollar terms.