(Bloomberg) – European stocks and U.S. stock futures were modest in cautious trading ahead of the release of long-awaited inflation data that could provide clues as to when the Federal Reserve will cut interest rates.
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Auto stocks were the best performers in Europe as Michelin rose on the tire maker's results and announcement of a share buyback. Overall, the European Stoxx 600 index fell 0.3%, while US stock futures were little changed. U.S. Treasuries and the dollar were firm ahead of the inflation report, which is expected to bring year-over-year headline inflation below 3% for the first time since March 2021, supporting optimism that price pressures are easing.
“We expect the data to continue to justify a much less pronounced Fed easing cycle than the market is currently pricing in,” said Win Hsin, head of global market strategy at Brown Brothers Harriman & Company. , “This will lead to support for the dollar.''
Slower-than-expected UK wage growth in the fourth quarter helped the pound strengthen, underscoring the need for the Bank of England to cut interest rates. Bets on BOE easing eased in money markets, with traders expecting the rate cut to fall to 71 basis points in 2024 from 78 basis points on Monday.
Meanwhile, Asian stocks rose for the first time in four days, led by Japanese stocks. Japan's Nikkei stock average has rebounded the most since November 2022, with tech stocks leading the rally after Tokyo Electron raised its full-year sales and profit forecasts. Markets in China, Hong Kong, Taiwan and Vietnam will be closed for the Lunar New Year.
Richmond Fed President Thomas Barkin said one of the lingering risks of inflation moving back toward the central bank's target comes from U.S. businesses. In recent years, many companies have boosted their profit margins by raising prices, a practice that is difficult to modify and can lead to upward pressure on inflation.
While bond traders are currently largely in line with the Fed's interest rate trajectory, Citigroup strategists say the market is overlooking the risk of higher rates following an easing cycle.
“Markets should be pricing in some risk of future rate hikes. We need to look ahead to 1998,” Jason Williams, global market strategist at Citigroup, said in a note. This cycle “could be similar to the 1998 easing cycle, which led to further rate hikes in the short term. If inflation does not return to a stable 2%, the upside potential for future Fed rate hikes is limited to this very short period.” It should expand from the depressed levels.”
Returning to Asia, the yen on Tuesday was trading around 149 yen to the dollar, down from 140 yen at the start of the year. The recent weakness reflects comments from BOJ officials that the bank is in no hurry to withdraw from support measures. The economy suffered a severe recession in the summer, but is expected to return to annual growth of 1.2% in the fourth quarter.
SoftBank, one of Japan's largest listed companies, rose 6.3% as the stock price of Arm Holdings, which owns the stock, rose further. Arm shares soared 29% in New York trading on Monday, nearly tripling since going public in September. Bloomberg's index of Asian semiconductor stocks was on pace to close to a nearly two-year high, boosted by strong earnings expectations from Tokyo Electron and a rally in Nvidia shares overnight.
“What we’re seeing here is an enthusiasm for anything that has to do with AI,” said Dennis Dick, a trader at Triple D Trading. “Argos are involved, retail traders are involved, people are buying options. It all just snowballs.”
After six days of gains ahead of the Organization of the Petroleum Exporting Countries (OPEC) market outlook, crude oil prices were firm as traders also kept an eye on developments in the Israel-Hamas war. Gold prices were little changed after falling slightly on Monday to trade around $2,020 an ounce.
This week's main events:
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German ZEW survey forecast, Tuesday
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US Consumer Price Index, Tuesday
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Eurozone industrial production, GDP, Wednesday
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BOE Governor Andrew Bailey testifies before the House of Lords Economic Committee on Wednesday
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Chicago Fed President Austan Goolsby speaks Wednesday
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Fed Vice Chairman for Supervision Michael Barr speaks on Wednesday
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Japan's GDP, industrial production, Thursday
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US manufacturing industry, number of new unemployment insurance claims, industrial production, retail sales, business inventories, Thursday
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ECB President Christine Lagarde speaks on Thursday
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Atlanta Fed President Rafael Bostic speaks Thursday
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Fed Director Christopher Waller speaks Thursday
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ECB Chief Economist Philip Lane speaks on Thursday
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U.S. Housing Starts, PPI, University of Michigan Consumer Sentiment, Friday
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San Francisco Fed President Mary Daley speaks on Friday
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Fed Vice Chairman for Supervision Michael Barr speaks on Friday
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ECB board member Isabel Schnabel speaks on Friday
The main movements in the market are:
stock
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As of 8:19 a.m. London time, the Stoxx European 600 was down 0.3%.
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S&P500 futures little changed
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Nasdaq 100 futures fell 0.1%
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Dow Jones Industrial Average futures little changed
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MSCI Asia Pacific Index rose 0.8%
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MSCI Emerging Markets Index rose 0.3%
currency
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Bloomberg Dollar Spot Index little changed
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The euro was almost unchanged at $1.0770.
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The Japanese yen fell 0.2% to 149.68 yen to the dollar.
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The offshore yuan was almost unchanged at 7.2167 yuan to the dollar.
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The British pound rose 0.1% to $1.2647.
cryptocurrency
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Bitcoin rises 0.5% to $50,077.94
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Ether rose 0.9% to $2,656.47
bond
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The 10-year Treasury yield rose 1 basis point to 4.19%.
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Germany's 10-year bond yield rose 1 basis point to 2.37%.
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The UK 10-year bond yield rose 4 basis points to 4.09%.
merchandise
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Brent crude rose 0.3% to $82.24 per barrel.
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Spot gold rose 0.2% to $2,024.75 an ounce.
This article was produced in partnership with Bloomberg Automation.
—With assistance from Eddy Duan and Jan-Patrick Barnert.
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