The Nikkei 225 has hit a 34-year high. Rising inflation in the US may push back the US Fed’s plans to cut rates in the spring :: InvestMacro

By JustMarkets

At yesterday’s stock market close, the Dow Jones Index (US30) was up by 0.45%, while the S&P 500 (US500) added 0.57% on Wednesday. The NASDAQ Technology Index (US100) closed positive by 0.75%.

Today, the US will release its monthly consumer price index (CPI) report. The overall CPI is expected to rise from 3.1% to 3.2% year-over-year. At the same time, core CPI, which excludes volatile food and energy prices, will decline from 4% y/y to 3.8% y/y. Lower inflation will increase the likelihood that the Fed will cut interest rates as early as March. In such a scenario, the US dollar will be under pressure, which will give confidence to risky assets (EUR, GBP) as well as indices.

On the contrary, rising inflation will reduce the probability of a rate cut this spring and reduce the number of basis points of rate cuts throughout the year. In such a scenario, the US dollar would gain support, while risk assets, gold, and stock indices would come under pressure. If the data turns out to be mixed (overall inflation rises and core inflation falls), it will only lead to a spike in volatility and will not bring more specificity to the US Fed’s plans. But given that the probability of a rate cut in March fell from 99% to 70% in one week and the fact that the latest US jobs report showed a resilient labor market, a mixed inflation report would be more likely to benefit the US dollar.

The Canadian dollar has been falling steadily against the US dollar over the past few weeks on the back of hawkish statements from Fed Chairman Jerome Powell, as well as a significant drop in global crude oil prices. With oil now finding some support and OPEC+ potentially announcing an extension of voluntary production cuts into next year, the Canadian dollar could strengthen against the US dollar in the short term. However, upcoming US CPI data will be crucial for Fed guidance and could prompt Fed officials to be more hawkish if inflation exceeds expectations.

Equity markets in Europe traded flat yesterday. Germany’s DAX (DE40) added 0.01%, France’s CAC 40 (FR40) fell by 0.01% on Wednesday, Spain’s IBEX 35 (ES35) rose by 0.07%, and the UK’s FTSE 100 (UK100) closed negative by 0.42%.

ECB Executive Board spokesman Schnabel said yesterday that it is too early to discuss rate cuts, and the ECB will keep key rates at restrictive levels until it is confident that inflation will steadily return to the 2% target. For this, additional data confirming the disinflationary process is needed. For his part, ECB Vice President Gindos said that the eurozone may have been in a recession late last year, and incoming data suggest that the future remains uncertain and the outlook is tilted to the downside. Swaps estimate the odds of a 25 bps ECB rate cut at 3% at the next meeting on January 25 and 37% at the March 7 meeting.

Crude oil prices initially jumped on Wednesday after Houthi rebels carried out one of the largest missile and drone attacks on commercial shipping lanes in the Red Sea, potentially disrupting global crude supplies. But crude prices fell in the afternoon after the EIA’s weekly crude stockpile data unexpectedly rose, and gasoline and distillate inventories rose more than expected, pointing to weak energy demand.

Asian markets traded mostly lower yesterday. Japan’s Nikkei 225 (JP225) gained 2.01% for the day, China’s FTSE China A50 (CHA50) fell by 0.30%, Hong Kong’s Hang Seng (HK50) ended the day down by 0.57%, and Australia’s ASX 200 (AU200) ended the trading day negative by 0.69%.

Japan’s Nikkei 225 (JP225) continues to rally after hitting a 34-year-high yesterday. The index rallied on broad-based gains, although technology and auto stocks were the most active. The recent rally in Japanese stocks has been driven mainly by expectations that the Bank of Japan will maintain its ultra-low policy in the near term, especially amid efforts to stimulate the economy following the devastating earthquake in central Japan. Thanks to the Bank of Japan’s soft policy, the Nikkei has become one of the best-performing global equity indices in 2023, jumping 30% year-on-year.

S&P 500 (US500) 4,783.45 +26.95 (+0.57%)

Dow Jones (US30) 37,695.73 +170.57 (+0.45%)

DAX (DE40)  16,689.81 +1.45 (+0.01%)

FTSE 100 (UK100) 7,651.76 −32.20 (−0.42%)

USD Index  102.39 −0.18 (−0.18%)

News feed for 2024.01.11:

• – Australia Trade Balance (m/m) at 02:30 (GMT+2);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+2);
• – US Consumer Price Index (m/m) at 15:30 (GMT+2);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.