Market Pulse: A Rare New Year Bounce
As the global economy kicks off 2025, a surprising uptick in stocks has taken center stage, driven by a stabilization of bond markets and a slight easing of the strong US dollar. This welcome respite comes ahead of critical inflation and corporate earnings updates.
Tariff Hikes: A Gradual Approach?
A peculiar narrative emerged on Monday, with reports suggesting President-elect Donald Trump’s team is considering gradual tariff hikes using emergency legislation. While this may have brought some relief, the prospect of months or even years of incremental tariff increases doesn’t bode well for smooth market sailing or easing inflation concerns.
Bond Markets Take a Breather
The relentless selloff in Treasuries has paused, at least for now, with 10-year benchmark Treasury yields dialing back from 14-month highs above 4.8%. The 30-year ‘long bond’ yields are also holding steady at 5%. This brief respite has filtered through to Wall Street stocks and global markets.
Inflation Expectations: A Mixed Bag
The New York Fed’s December consumer survey painted a more nuanced picture of public inflation expectations, with households’ expected path of inflation a year from now remaining steady at 3%. While the 3-year view rose to 3% from 2.6% in November, the 5-year view ebbed to 2.7% from 2.9%. This saw Fed futures regain their footing, with the market now pricing in one interest rate cut by October.
Crude Oil Prices Stall, Calming Bond Markets
A stalling of crude oil prices, which hit four-month highs on Monday, has also calmed the bond market. However, annual headline and ‘core’ US producer price inflation readings due later today are expected to show a significant pickup.
Earnings Season Kicks Off
The fourth-quarter earnings season starts in earnest on Wednesday, with many big banking names leading the charge. The dollar has stepped back with Treasury yields, retreating from 2-year highs. Ailing sterling has bounced from 14-month lows as British government bonds stabilized in line with Treasuries.
Global Markets React
Chinese stocks were a standout gainer overnight, with the mainland CSI300 clocking a rise of 2.7% and staging its best day since November 7. Local chip firms also rallied after the US stepped up its tech curbs. The reports about more gradual US tariff rises may have also helped, and traders are awaiting Friday’s swathe of monthly economic releases, including fourth-quarter Chinese GDP data.
Chinese Central Bank Warns of Market Bubble
Chinese central bank official Zou Lan warned of a potential market bubble and resulting turbulence if bond yields depart from economic fundamentals. Fast-falling Chinese bond yields have been complicating Beijing’s efforts to stabilize a weakening yuan.
What’s Ahead
The inflation news will dominate sentiment this week, but the release of December retail sales on Thursday will also provide an important take on the holiday shopping season. Key developments that should provide more direction to US markets later today include the US December producer price report and the NFIB Dec small business survey.
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