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Markets were buoyed by growing hopes of a soft landing for the US and eurozone economies

Markets were buoyed by growing hopes of a soft landing for the US and eurozone economies

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Rising economic optimism boosted stock markets on both sides of the Atlantic on Friday, after euro-zone inflation figures and US jobs data boosted hopes of a soft landing this year.

However, economists warned that while the recent sharp drop in energy prices has improved the outlook for 2023, underlying inflation would keep pressure on central banks to raise interest rates further to keep price increases under control.

Philip Rush, founder of the consulting firm Heteronomics, said: “Inflation will not be able to sustainably return to target until this core problem is overcome.”

Euro-zone inflation data for December – slipping back into single digits – helped European equities to their best performance in the opening week of the year since 2009, when investors shed some of their gloomy year-end sentiment.

Goldman Sachs noted that lower wholesale natural gas prices, which would be more than 75 percent below their peak in Europe, “would boost real income; help push down inflation; and improvement of national budgets”. It added that another boost in exports would come from the end of China’s zero-Covid policy.

Stoxx 600 column chart showing European equities to make a lively debut in 2023

In the US, the S&P rose nearly 2 percent in afternoon trade after job growth slowed for a fifth straight month and hourly wages rose less-than-expected, offering some comfort against inflationary pressures. A survey showed activity in the huge US services sector unexpectedly contracted in December, the first drop since the coronavirus crisis in May 2020.

But US job growth was faster-than-expected at 223k in December, while the unemployment rate fell to an all-time low, suggesting little of a slowdown in US economic output that would quickly lower inflation.

In both the euro zone and the US, robust economic data heightened concerns that central banks must continue their efforts to bring inflation down to last year’s low levels despite clear signs that inflation has peaked. Central bankers fear that inflation on both sides of the Atlantic is more likely to remain around 4-5 percent rather than falling towards its 2 percent target.

Dorothee Rouzet, economist at Citi, said the European data “now [point] into a very mild recession, bordering on no recession”. That, she added, would encourage central bank hawks to “worry about wages [profit] assume margins [from energy] as a driver of inflation”.

Falling gas and petrol prices in the euro zone helped inflation in the region fall to a below-expected 9.2 percent from 10.1 percent.

The drop in energy prices also pushed the EU’s economic sentiment indicator to just 4 percent below its long-term average.

However, as non-energy services and industrial goods prices rose faster in December, the region’s core inflation rate – which excludes energy and food prices – edged up slightly to reach 5.2 percent, the highest since the single currency was introduced in 1999.

The European Central Bank is expected to hike interest rates by another percentage point to 3 percent at two meetings in February and March, with a peak of around 3.5 percent before the summer. The US Federal Reserve is expected to hike interest rates above 5 percent and keep them there for an extended period until US inflationary pressures ease.

In a sign that the US economy is still hotter than the Fed would like, December’s job growth figure of 223k exceeded economists’ expectation of a 200k rise.

According to official figures, the unemployment rate unexpectedly fell to a historic low of 3.5 percent. “This is still a very tight job market,” said Veronica Clark, economist at Citi. “A low unemployment rate for an economist [is] future upside risks to wages.”

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