Yesterday offered an almost ideal news flow for global investors. First, the British inflation came in softer than expected. The most-watched services inflation eased from 5% to 4.4% last month, to the lowest since March 2022, and led to a much-needed relief in the UK gilt markets. The 10-year gilt yield gapped lower at the start of the session and eased about 20bp compared to the day before, Cable rebounded on the bond relief and FTSE 100 rallied more than 1% on expectation that the Bank of England (BoE) could cut rates twice this year.
Then, the US took over and announced a set of softer-than-expected inflation figures, as well Headline inflation in the US rebounded from 2.7% to 2.9% as expected in December, but core inflation eased unexpectedly from 3.3% to 3.2%. The cherry on top: the Empire State Manufacturing Index unexpectedly plunged in January, offering some relief to the Federal Reserve (Fed) doves which spent the first weeks of the new year watching the dream of rate cuts sailing away. Yesterday’s data brought rate cut expectations back on the table. The US 2-year yield plunged more than 10bp to below 4.30% and the US 10-year yield dived up to 15bp to 4.65%. Activity on Fed funds futures now hints that the Fed’s next rate cut could arrive in May -and not June – and that’s a blast for the equity markets which also benefited from a set of strong earnings from the big US banks. Together, the four big banks that released earnings yesterday – JP Morgan, Wells Fargo, GS, and Citigroup – printed more than $100bn profit last year, the second highest yearly profit ever. JP Morgan alone topped a $50bn annual profit mark thanks to exceptional jump in profits boosted by election volatility in Q4, Wells Fargo announced a 12% cut in expenses, Goldman’s Q4 profit doubled compared to a year ago, while Citigroup gained investors’ heart yesterday with the announcement of a $20bn stock buyback. All in all, Invesco’s bank ETF jumped more than 4% yesterday. More big banks will be releasing earnings today.
Zooming out, the S&P500 gained more than 1.80% on the back of softer-than-expected inflation data and better-than-expected bank earnings. The Magnificent 7 rallied more than 3.50% despite discouraging news of more export curbs for chip companies, the Stoxx 600 index traded past its 200-DMA, crude oil rallied above the $80pb despite the ceasefire agreement in Gaza and the US dollar gave back gains.
But the USD is stronger before the December retail sales data – which could confirm the strength of US consumer spending and counter a part of yesterday’s inflation optimism. Don’t forget that the core inflation in the US is still above the 3% mark – well above the Fed’s 2% target and hardly coming lower – and the trade war between the US and China is about to spread to the rest of the world. Even though Trump’s new team is aiming to raise tariffs gradually, a 10% universal tariff and a 60% tariff for China would amount in an average tariff of 17% according to Barclays and could only raise pressure on consumer prices in the US.
Some bad news
German economy shrank for the second consecutive year for the first time since the beginning of 2000s and given the actual state of things, Germany is not expected to do much better this year. The latter weakness is maintaining the hope that the European Central Bank (ECB) will give an ample support to the weakening European economies this year and helps explaining why the DAX index hit a fresh record high yesterday despite the bad news, but the EURUSD is having hard time maintaining its advance above the 1.03 mark. The fact that a broadly softer US dollar on soft inflation couldn’t help to reverse losses confirms that the bearish tide is relatively strong. The EURGBP hit the high mark of the downtrending channel at 0.8463 yesterday, however, as sterling remains under a stronger downside pressure due to British debt headaches.
Sterling bulls and bears are still struggling to take the lead around the 1.22 against the US dollar. The expectations that the BoE could cut its rates twice this year gives relief to the gilt market, hence decreases the need for more concessions on spending plans and improves UK’s growth outlook. But that’s a meagre improvement, mind you: this morning’s GDP update came in lower than expected for November, keeping the outlook for sterling firmly in the bearish camp.
Elsewhere, the USDJPY took a decent dive yesterday and tipped a toe below the 156 level on the back of a broadly softer US dollar and a strong rebound in the Japanese yen on raising expectation that the Bank of Japan (BoJ) could announce a rate hike as early as next week. If the BoJ hikes next week, the USDJPY could return below its 200-DMA sustainably and test the major 38.2% Fibonacci support on the September to January rebound, near 151.15 level. A slide below that level would indicate a medium-term bearish reversal for the pair.
In energy, the fact that crude oil is now trading near the $80pb raises a few questions. The latest rally was led by geopolitical factors and brought the IEA to revise its surplus forecast lower this year. The prospects of rate cuts are also supportive of demand outlook, but for now, the gains are supported by the supply-side news, hence remain vulnerable. I expect to see increased incentive to sell the top near the $80pb level and expect support near the $75/77pb range.
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