Market Outlook: Inflation Fears Take Center Stage
As the global bond market teeters on the edge, investors are bracing themselves for a crucial day ahead. The release of CPI reports from Britain and the U.S. is expected to dictate the market’s trajectory, with inflation risks skewed firmly to the upside.
A Perfect Storm of Inflationary Pressures
The return of Donald Trump to the White House next Monday, accompanied by a flurry of executive orders, is set to stoke inflation fears. Even a consensus result for U.S. CPI may not be enough to alleviate the bearish pressure on bonds, warn analysts.
Asian Markets Struggle for Direction
In Asia, shares are struggling to find their footing. MSCI’s broadest index of Asia-Pacific shares outside Japan edged down 0.1%, while Japan’s Nikkei seesawed between gains and losses, ultimately ending flat.
European Markets Await CPI Data
U.S. equity futures are flat, but Pan-European STOXX 50 futures inched up 0.1%, and UK FTSE futures rose 0.2% ahead of British consumer price data. Headline inflation is expected to hold steady at 2.6% in December, while the core measure is seen easing slightly to 3.4% from 3.5% the prior month.
The Pound Under Pressure
A higher-than-expected inflation reading would provide the perfect excuse for speculators to short gilts, where yields have soared to 16-year highs amid concerns about Britain’s fiscal health. The pound, already pinned near a 14-month trough, would come under further pressure, testing a key chart level of $1.2056.
U.S. CPI Data Takes Center Stage
The U.S. CPI data, due later today, is expected to be the next major hurdle for investors. Forecasts suggest a monthly rise of 0.2% in the core measure, with a tight range of 0.2% to 0.3%. A reading of 0.3% or more would trigger another bout of heavy selling in Treasuries, pushing 10-year yields towards the 5% mark and lifting the dollar.
Earnings Season Kicks Off
U.S. fourth-quarter 2024 earnings will also get underway on Wednesday, with results from major U.S. banks, including Citi and JPMorgan. Lenders are expected to report stronger earnings, driven by robust dealmaking and trading. However, given lofty expectations, the risk of missing estimates is high.
Key Developments to Watch
Investors will be keeping a close eye on the following key developments today:
- UK CPI for December
- France CPI for December
- Euro zone industrial production figures for November
- US CPI for December
- Speeches from Fed officials, including New York President John Williams, Chicago President Austan Goolsbee, and Richmond President Thomas Barkin
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