Markets seek direction from US CPI report

Risk rally cools ahead of all-important inflation report 

Equities were mixed on Tuesday while major currency pairs traded within their recent ranges, with some exceptions, ahead of the crucial CPI numbers due out of the United States later in the day. After flirting with record territory again on Monday, the S&P 500 and Nasdaq 100 ended the session slightly in the red. The Dow Jones was more successful at closing at a new all-time high, but the rally appears to have lost some steam, with many investors likely taking to the sidelines as they wait for the latest CPI gauge.

Only a handful of Wall Street giants have yet to report their earnings and they’re unlikely to spoil what has been a solid season, as the S&P 500 looks set to post a second straight quarter of year-over-year earnings growth.

European shares are tracking US futures lower but Asian markets that are trading this week were mostly positive on Tuesday as stocks in Tokyo surged. The Nikkei 225 index came within less than 1,000 points of its all-time high from 1989 amid renewed interest in Japanese stocks.

Softbank was one of the big gainers, getting a boost from its stake in chipmaker Arm Holdings, which rocketed by 29.3% in New York yesterday on the back of last week’s strong earnings results and the ongoing AI craze.

Fed maintains caution despite expected drop in CPI 

The big question now is whether this upbeat sentiment will survive the CPI test. Many analysts are predicting that headline CPI will drop below 3% in January for the first time since March 2021, while core CPI is expected to fall to 3.7% y/y.

An upside surprise could deal a further blow to early rate cut bets as a May move has also started to come into doubt lately.

Since the January FOMC meeting, Fed officials have been consistent in their communication that they’re in no rush to start easing at a time when the labour market remains very tight and inflation has some way to go before it reaches the 2% target in a sustainable manner.

Richmond Fed President Thomas Barkin warned on Monday, “there’s a real risk that there will be continued inflationary pressure”, underscoring policymakers’ caution on being too quick to declare victory on inflation.

Dollar holds firm as yen back under pressure 

US Treasury yields edged back up on Tuesday after dipping yesterday. The 10-year yield has been stuck around 4.15% for the past few sessions, unable to take the NFP-led rebound much further, but a retreat doesn’t seem to be on the cards either.

The lack of clear direction in yields has kept the US dollar within a sideways range against most major pairs, climbing to fresh highs only against the Japanese yen and Swiss franc.

The yen was on the backfoot again on Tuesday as investors are increasingly taking the view that any hawkish shift by the Bank of Japan this year will likely be limited. The danger is that as the dollar approaches the 150-yen level again, Japanese officials will probably resume their verbal intervention to talk up the yen.

A good start for sterling in busy data week 

The pound was one of the better performers against the greenback on Tuesday, rising above $1.2650 following better-than-expected employment figures. The UK jobless rate fell more than forecast in the three months to December to 3.8%, while wage growth didn’t slow as much as anticipated, giving the Bank of England little reason to cut rates sooner rather than later.

Tomorrow’s CPI numbers will likely matter a bit more for BoE rate cut expectations, but the jobs numbers have definitely set the tone for the rest of the week for sterling.

Bitcoin rally goes into overdrive 

Meanwhile, in the cryptocurrency world, Bitcoin extended its winning streak, surging by more than 3.0% on Monday to break past the $50,000 level for the first time since December 2021.

Bitcoin’s rally in the run up to the ETF approval suffered a sell the fact correction post the actual approval, but renewed interest ahead of its halving in April has led to a more than $1 billion inflow to crypto markets over the past week according to some reports.