Stocks struggle before crucial US inflation report: Markets Wrap

(Bloomberg) — European stocks and US equity futures posted small moves in cautious trading before the release of keenly awaited inflation data that could provide clues on the timing of Federal Reserve interest rate cuts.

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Auto stocks fared best in Europe as Michelin rallied after the tiremaker’s earnings and a share buyback announcement. Overall, the Europe Stoxx 600 index slipped 0.3%, while US equity futures were little changed. Treasuries and the dollar were steady before the inflation report, which is expected to show the first reading below 3% on year-over-year headline inflation since March 2021, supporting optimism price pressures are easing.

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

The pound strengthened after UK wage growth slowed less than expected in the fourth quarter, underscoring the case for the Bank of England to wait before cutting interest rates. Money markets pared wagers on BOE easing, with traders betting on 71 basis points of cuts in 2024, down from 78 basis points on Monday.

Meanwhile, shares in Asia climbed for the first time in four days, led by equities in Japan. The nation’s Nikkei 225 index rallied the most since November 2022, as tech shares led gains after Tokyo Electron Ltd. boosted its full-year revenue and profit guidance. Markets are closed in China, Hong Kong, Taiwan and Vietnam for Lunar New Year holidays.

Federal Reserve Bank of Richmond President Thomas Barkin said one simmering risk to inflation falling back toward the central bank’s target comes from US businesses. Many have boosted profit margins by raising prices in recent years — a practice that may be difficult to amend and one that would provide upward pressure for inflation.

Bond traders are now more in line with the Fed’s rate trajectory, but strategists at Citigroup Inc. say the market is overlooking the risk of rate increases following the easing cycle.

“The market should price in some risk of future hikes – look to 1998,” Jason Williams, global market strategist at Citigroup, wrote in a note. This cycle “could 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 consistent 2% the upside tails around future Fed hikes should increase from this very depressed level.”

Back in Asia, the yen fell Tuesday to trade around 149 per dollar, down from 140 at the start of the year. Recent softness reflects comments from Bank of Japan officials that the central bank will be in no hurry to exit supportive policy. The economy is seen returning to annualized growth of 1.2% in the fourth quarter after a bruising contraction in the summer.

SoftBank, one of Japan’s largest listed companies, rallied 6.3% after further gains for Arm Holdings Plc, in which it holds a stake. Arm shares jumped 29% in New York trading Monday and have almost tripled since listing in September. A Bloomberg gauge of semiconductor stocks in Asia was on pace for its highest close in nearly two years, propelled by Tokyo Electron’s strong earnings forecast and a rally in Nvidia shares overnight.

“What you’re seeing here is a feeding frenzy for anything to do with AI,” said Dennis Dick, trader at Triple D Trading. “Algos are getting involved, retail traders are getting involved, people are buying options. All that is just snowballing.”

Oil was steady after a six-day rally ahead of a market outlook from OPEC, and as traders also monitored developments in the Israel-Hamas war. Gold was little changed after falling slightly Monday to trade at around $2,020 per ounce Monday.

Key Events This Week:

  • Germany ZEW survey expectations, Tuesday

  • US CPI, Tuesday

  • Eurozone industrial production, GDP, Wednesday

  • BOE Governor Andrew Bailey testifies to House of Lords economic affairs panel, Wednesday

  • Chicago Fed President Austan Goolsbee speaks, Wednesday

  • Fed Vice Chair 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, Thursday

  • Atlanta Fed President Raphael Bostic speaks, Thursday

  • Fed Governor Christopher Waller speaks, Thursday

  • ECB chief economist Philip Lane speaks, Thursday

  • US housing starts, PPI, University of Michigan consumer sentiment, Friday

  • San Francisco Fed President Mary Daly speaks, Friday

  • Fed Vice Chair for Supervision Michael Barr speaks, Friday

  • ECB executive board member Isabel Schnabel speaks, Friday

Some of the main moves in markets:

Stocks

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

  • S&P 500 futures were little changed

  • Nasdaq 100 futures fell 0.1%

  • Futures on the Dow Jones Industrial Average were little changed

  • The MSCI Asia Pacific Index rose 0.8%

  • The MSCI Emerging Markets Index rose 0.3%

Currencies

  • The Bloomberg Dollar Spot Index was 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

Bonds

  • The yield on 10-year Treasuries advanced one basis point to 4.19%

  • Germany’s 10-year yield advanced one basis point to 2.37%

  • Britain’s 10-year yield advanced four basis points to 4.09%

Commodities

  • 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 assistance of Bloomberg Automation.

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

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