Stocks struggle before crucial US inflation report: Markets Wrap


(Bloomberg) — European stocks and U.S. stock futures showed slight moves in cautious trading ahead of the release of highly anticipated inflation data that could provide clues on the timing of interest rate cuts in the Federal Reserve.

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Automotive stocks performed better in Europe, with Michelin recovering after the tire maker's results and the announcement of a share buyback. Overall, the Europe Stoxx 600 index slipped 0.3%, while U.S. stock futures were little changed. Treasuries and the dollar were stable ahead of the release of the inflation report, which is expected to show an overall inflation rate below 3% year-on-year for the first time since March 2021, supporting optimism and easing price pressures.

“We expect the data to continue to support a much less pronounced Fed easing cycle than the market currently anticipates,” said Win Thin, global head of markets strategy at Brown Brothers Harriman & Co. “This should help support the dollar.”

The pound strengthened after U.K. wage growth slowed less than expected in the fourth quarter, justifying the Bank of England waiting before cutting interest rates. Money markets reduced their bets on BoE easing, with traders betting on cuts of 71 basis points in 2024, up from 78 basis points on Monday.

Meanwhile, Asian stocks rose for the first time in four days, led by Japanese shares. The country's Nikkei 225 index saw its biggest rise since November 2022, with technology stocks leading the gains after Tokyo Electron Ltd. has raised its revenue and profit forecasts for the full year. Markets are closed in China, Hong Kong, Taiwan and Vietnam for the Lunar New Year holiday.

Federal Reserve Bank of Richmond President Thomas Barkin said one of the latent risks of inflation returning toward the central bank's target comes from U.S. businesses. Many have increased their profit margins by raising prices in recent years – a practice that could be difficult to change and would lead to upward pressure on inflation.

Bond traders are now more in tune with the Fed's rate path, but Citigroup Inc. strategists say the market is discounting the risk of rate hikes after the easing cycle.

“The market should price in some risk of future increases – look to 1998,” Jason Williams, global markets strategist at Citigroup, wrote in a note. This cycle “may be more akin to the 1998 easing cycle, which was short-lived and led to more rate hikes. If inflation does not return to a steady 2%, the upside implications around future Fed hikes should increase from this very depressed level.

In Asia, the yen fell on Tuesday to trade around 149 per dollar, compared to 140 at the start of the year. The recent weakness reflects comments from Bank of Japan officials that the central bank will be in no rush to end its supportive policy. The economy is expected to return to annualized growth of 1.2% in the fourth quarter after a sharp contraction over the summer.

SoftBank, one of Japan's largest listed companies, rose 6.3% after further gains for Arm Holdings Plc, in which it has a stake. Arm's shares jumped 29% Monday in New York and have nearly tripled since they were listed in September. The Bloomberg index of Asian semiconductor stocks was poised to hit its highest level in nearly two years, propelled by Tokyo Electron's strong earnings forecast and Nvidia's stock rally overnight .

“What you're seeing here is a feeding frenzy for anything related to AI,” said Dennis Dick, a trader at Triple D Trading. “Algorithms are getting involved, retail traders are getting involved, people are buying options. This all just snowballs.

Oil held steady after six days of gains ahead of OPEC's market outlook and as traders also monitored developments in the war between Israel and Hamas. Gold was little changed after falling slightly on Monday to trade around $2,020 an ounce on Monday.

Key events this week:

  • Expectations from the ZEW survey in Germany, Tuesday

  • US CPI, Tuesday

  • Eurozone industrial production, GDP, Wednesday

  • BOE Governor Andrew Bailey testifies before the House of Lords economic affairs panel on Wednesday.

  • Chicago Fed President Austan Goolsbee speaks Wednesday

  • Fed Vice Chairman for Supervision Michael Barr Speaks Wednesday

  • Japan GDP, industrial production, Thursday

  • US Empire Manufacturing, Initial Jobless Claims, Industrial Production, Retail Sales, Business Inventories, Thursday

  • ECB President Christine Lagarde speaks on Thursday

  • Atlanta Fed President Raphael Bostic speaks Thursday

  • Fed Governor Christopher Waller speaks Thursday

  • ECB Chief Economist Philip Lane speaks on Thursday

  • U.S. Housing Starts, PPI, University of Michigan Consumer Sentiment, Friday

  • San Francisco Fed President Mary Daly speaks Friday

  • Fed Vice Chairman for Supervision Michael Barr speaks Friday

  • Isabel Schnabel, member of the ECB executive board, speaks on Friday

Some of the main market movements:

Actions

  • The Stoxx Europe 600 fell 0.3% at 8:19 a.m. London time

  • S&P 500 futures little changed

  • Nasdaq 100 futures fell 0.1%

  • Dow Jones Industrial Average futures little changed

  • The MSCI Asia-Pacific index rose 0.8%

  • The MSCI Emerging Markets Index rose 0.3%

Currencies

  • Bloomberg Dollar Spot Index little changed

  • The euro was little changed at $1.0770

  • The Japanese yen fell 0.2% to 149.68 per dollar

  • The offshore yuan was little changed at 7.2167 per dollar.

  • The British pound rose 0.1% to $1.2647

Cryptocurrencies

  • Bitcoin rose 0.5% to $50,077.94

  • Ether rose 0.9% to $2,656.47

Obligations

  • The yield on 10-year Treasury notes rose one basis point to 4.19%

  • The German 10-year yield rose one basis point to 2.37%

  • The UK 10-year yield rose four basis points to 4.09%

Raw materials

  • Brent crude rose 0.3% to $82.24 a barrel

  • Spot gold rose 0.2% to $2,024.75 an ounce

This story was produced with the help of Bloomberg Automation.

—With help from Eddy Duan and Jan-Patrick Barnert.

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