U.S. stocks ended January with a gain, as investors cheered signs of labor costs easing and inflation cooling as they gear up for Wednesday’s Federal Reserve decision. 

With volumes relatively light on Tuesday, the stock gains could have been spurred by short covering. The S&P 500 still had its best month since October, as traders expect the Fed to slow its pace of interest-rate hikes. The Nasdaq 100 rallied the most this month since July and had its best start to year since 2001, according to data compiled by Bloomberg.

Treasuries gained, with the 10-year yield sliding to around 3.49 per cent. It fell more than 30 basis points during January, the most since November. A dollar index dropped.

Investors are grappling with a flurry of economic data, earnings and rate decisions this week. Data on Tuesday showed prices in U.S. housing market continued to cool, while another report highlighted consumer confidence unexpectedly falling. Hanging over everything is Wednesday’s Fed decision, with the central bank widely expected to raise rates by a quarter percentage point. 

While Tuesday’s data from the Labor Department added to evidence that wage growth is slowing, it may still not be enough to sway the Fed. Investors will be watching for the tone officials set for future meetings. While Fed Chair Jerome Powell has repeatedly pushed back against hopes of rate cuts later this year, central bank officials could consider pausing rate hikes after their March meeting.

But the recent rally in stocks and bonds does not help the Fed’s bid to tighten financial conditions, said Jeff Muhlenkamp, portfolio manager at Muhlenkamp & Co. 

Speaking about Powell’s presser Wednesday, he said “I expect that he will continue to try to talk the market into doing something that it is not currently doing.”

Investors also assessed a bevy of earnings reports on Tuesday. Shares of McDonald’s Corp. declined and those of Caterpillar Inc. fell the most since Sept. 23 after earnings misses. Meanwhile, General Motors Co. rose after posting upbeat forecasts. Exxon Mobil Corp.’s fourth quarter earnings per share beat estimates and the firm posted full-year profit that was the highest on record. 

Now that investors have had a chance to parse a slew of economic reports and earnings results to start the year — with much of it coming in as expected — they’re focusing on what the Fed might do in the latter half of 2023, says Shawn Cruz, head trading strategist at TD Ameritrade.

“So I think we know where our baseline is now and what’s driving markets is Fed policy going into the second half of this year,” he said in an interview.

Key events this week:

• Eurozone Manufacturing PMI, CPI, unemployment, Wednesday
• U.S. construction spending, ISM Manufacturing, light vehicle sales, Wednesday
• FOMC rate decision, Fed Chair Jerome Powell press conference, Wednesday
• Earnings Wednesday include: Meta Platforms and Peloton Interactive
• Eurozone ECB rate decision, President Christine Lagarde press conference, Thursday
• UK BOE rate decision, Thursday
• U.S. factory orders, initial jobless claims, U.S. durable goods, Thursday
• Earnings Thursday include: Alphabet, Apple, Amazon, Qualcomm and Deutsche Bank and Santander
• Eurozone S&P Global Eurozone Services PMI, PPI, Friday
• U.S. unemployment, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.5 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 1.6 per cent
• The Dow Jones Industrial Average rose 1.1 per cent
• The MSCI World index fell 0.9 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.2 per cent to US$1.0872
• The British pound fell 0.2 per cent to US$1.2328
• The Japanese yen rose 0.2 per cent to 130.16 per dollar

Cryptocurrencies

• Bitcoin rose 1.5 per cent to US$23,090.48
• Ether rose 1.9 per cent to US$1,586.45

Bonds

• The yield on 10-year Treasuries declined five basis points to 3.49 per cent
• Germany’s 10-year yield declined three basis points to 2.29 per cent
• Britain’s 10-year yield was little changed at 3.33 per cent

Commodities

• West Texas Intermediate crude rose 1.5 per cent to US$79.03 a barrel
• Gold futures rose 0.2 per cent to US$1,943.10 an ounce