Investors were biting their nails ahead of the highly-anticipated U.S. CPI release, leading to plenty of market consolidation before big breakouts were seen.
Headline inflation came in line with consensus, but the core CPI showed moderating price pressures enough to keep most market players hopeful for more Fed rate cuts.
Take a look at the latest economic updates!
Headlines:
- BOJ Governor Kazuo Ueda signaled a potential rate hike next week in remarks during the Regional Banks Association of Japan event
- BOJ Deputy Governor Ryozo Himino shared that a rate hike is on the table in next week’s meeting
- Japan Reuters Tankan Index: 2 in Dec (3 forecast; -1 previous)
- Japan Machine Tool Orders YoY: 11.2% in Dec (3.00% forecast; 3.00% previous)
- Germany Wholesale Prices 0.10% in Dec: (0.10% forecast; 0.00% previous)
- U.K. CPI monthly rate for December 2024: 0.3% m/m (0.40% m/m forecast; 0.10% m/m previous)
- U.K. Core CPI Annualized Rate for December 2024: 3.20% y/y (3.40% y/y forecast; 3.50% y/y previous)
- U.K. CPI Annualized Rate for December 2024: 2.5% y/y (2.70% y/y forecast; 2.60% y/y previous)
- U.K. PPI Output for December 2024: 1.50% (2.10% forecast; 1.60% previous)
- U.K. Retail Price Index YoY for December 2024: 3.50% (3.60% forecast; 3.60% previous)
- Euro area Industrial Production: 0.20% in Nov (0.30% forecast; 0.00% previous)
- Canada Manufacturing Sales Final for November 2024: 0.80% m/m (0.50% m/m forecast; 2.10% m/m previous)
- Canada Wholesale Sales Final for November 2024: -0.20% m/m (-0.70% m/m forecast; 1.00% m/m previous)
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U.S. December CPI turned out cooler than expected:
- U.S. CPI Rate MoM: 0.4% in Dec (0.30% forecast; 0.30% previous)
- U.S. CPI Rate YoY: 2.9% in Dec(2.90% forecast; 2.70% previous)
- U.S. Core CPI Rate MoM: 0.20% in Dec (0.30% forecast; 0.30% previous)
- U.S. NY Empire State Manufacturing Index: -12.6 in Jan (3.1 forecast; 0.2 previous)
- U.S. EIA Crude Oil Stocks Change: -2.0M (-1.0M forecast; -0.96M previous)
- BOE policymaker Alan Taylor suggested pre-emptive rate cuts to potentially prevent a hard landing in the U.K.
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FOMC members sounded cautiously optimistic about inflation:
- Richmond Fed President Thomas Barkin expressed optimism about inflation easing toward the 2% target, adding that price-setting behavior is returning to pre-pandemic trends
- New York Fed President John Williams highlighted the data-dependent nature of policy amid uncertainties, projecting moderate growth of 2% and stable unemployment around 4%–4.25%
- Chicago Fed President Austan Goolsbee pointed to recent inflation data as reflective of progress toward the 2% target over the past six months
- Fed Beige Book indicated that economic activity in late November and December increased slightly to moderately across the twelve districts, thanks to strong consumer spending during the holiday season and modest growth in vehicle sales
Broad Market Price Action:
Dollar Index, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay Chart by TradingView
Market caution was evident ahead of the crucial U.S. CPI report, with most major asset classes moving within tight ranges during the Asian and London sessions before risk rallies took place on cooler than expected results.
Equity markets surged higher as investors paid close attention to softer core inflation, which prompted estimates of a lower U.S. core PCE price index, leading the S&P 5o0 index to surge 1.83% and the Nasdaq to jump 2.45%.
Crude oil continued its upward trajectory, climbing $2.85 to settle at $80.35 per barrel. Gains were also supported by larger than expected reductions in EIA inventories. Gold took advantage of a weaker dollar, rising 0.69% to reach $2,694.00 while BTC/USD briefly crossed the psychological $100,000 mark before settling at $99,686.
Treasury yields, which had been hovering near 14-month highs, saw a significant retreat after the CPI data report and a downside surprise in the Empire State manufacturing index. The benchmark 10-year yield dropped 13.3 basis points to 4.655%, while the 2-year yield declined 9.9 basis points to 4.265%, reflecting sustained rate cut expectations.
FX Market Behavior: U.S. Dollar vs. Majors:
Overlay of USD vs. Major Currencies Chart by TradingView
Majority of USD pairs cruised carefully sideways in the early Asian session, although USD/JPY broke sharply lower on account of more hawkish BOJ commentary lifting the odds of an interest rate hike in next week’s meeting.
GBP/USD dipped briefly lower upon seeing cooler U.K. December CPI data, but sterling eventually joined the rest of its forex peers in capitalizing on dollar weakness leading up to the U.S. inflation report.
After another bout of consolidation before U.S. markets opened, the U.S. dollar dropped sharply on weaker core inflation figures that kept traders hopeful for more Fed interest rate cuts. The Empire State manufacturing survey results, which turned out significantly below consensus, likely contributed to USD selling as well.
However, the dollar soon pulled higher a few hours after the CPI release, as traders got wind of cautiously optimistic remarks from FOMC officials. By session’s end, the dollar was able to end in the green versus EUR (+0.12%) but remained in negative territory versus the rest of its counterparts, most notably JPY (-1.04%).
Upcoming Potential Catalysts on the Economic Calendar:
- U.K. GDP at 7:00 am GMT
- U.K. industrial production at 7:00 am GMT
- ECB monetary policy meeting accounts at 12:30 pm GMT
- U.S. retail sales report at 1:30 pm GMT
- U.S. Philly Fed index at 1:30 pm GMT
- FOMC member Williams’ speech at 4:30 pm GMT
- New Zealand BusinessNZ manufacturing index at 9:30 pm GMT
Additional dollar volatility could come in play later today, as traders turn their attention to the U.S. retail sales report for December. Keep an eye out for any surprises that could still influence Fed policy expectations and overall market sentiment!