Ahead of the US CPI report, investors are liquidating long positions in equities

By JustMarkets 

At Monday’s stock market close, the Dow Jones (US30) index was up 0.33% and set a new all-time high. The S&P 500 index (US500) was down 0.10%. The NASDAQ Technology Index (US100) closed negative 0.30%. Ahead of the monthly US consumer price report, equities were pressured by long-position liquidation.

Fed Chair Bowman’s hawkish comments on Tuesday also weighed on stocks when she stated that current interest rates are in a good place to maintain downward pressure on inflation and that she does not believe a Fed rate cut is appropriate in the near term.

Today, the US will release its consumer inflation (CPI) report. On an annualized basis, overall inflation is expected to fall from 3.4% to 3.1%. Core inflation (which excludes food and energy prices) is forecast to fall from 3.9% to 3.7% y/y. If progress with inflation continues, this will put pressure on the dollar index but will also have a favorable impact on stock indices and the precious metals market (gold and silver). Suppose progress in the fight against inflation stalls or develops less favorably than expected. In that case, the US Treasury yields will likely jump as traders abandon bets on the sharp rate cuts scheduled for this year and push back the expected start date of the Fed’s easing cycle. Such an outcome would have to be favorable for the US dollar soon and hurt risk assets (euro, British pound, stock indices, and gold).

Equity markets in Europe were mostly up on Monday. Germany’s DAX (DE40) rose 0.65%, France’s CAC 40 (FR 40) gained 0.55% yesterday, Spain’s IBEX 35 (ES35) jumped 0.89% on Monday, and the UK’s FTSE 100 (UK100) closed positive 0.02%.

The European Central Bank does not need to weaken the eurozone economy further to bring inflation under control as demand is still weak, ECB board spokesman Piero Cipollone said on Monday. These comments contrast with other more hawkish remarks from ECB officials. Currently, swaps are priced at a 25 bps chance of an ECB rate cut of 11% at the next meeting on March 7 and 60% at the April 11 meeting.

WTI crude futures hit around $77 a barrel on Tuesday, near their highest levels in two weeks, as heightened geopolitical tensions in the Middle East continue to support oil prices. On Monday, Israel launched airstrikes on the southern Gaza city of Rafah after Israeli Prime Minister Benjamin Netanyahu rejected a ceasefire offer from Hamas. However, diplomatic talks in Beirut indicate possible progress in reducing tensions between Israel and Hamas. Meanwhile, uncertainty on the demand side could limit oil price gains as inflation risks could delay interest rate cuts by the Federal Reserve.

Most markets in the Asia-Pacific region, including China, Hong Kong, Japan, South Korea, and Singapore, were closed for holidays. Australia’s ASX 200 (AU200) ended the day positively, 0.06%.

Inflation expectations in New Zealand reached the lowest level in 2 years at 2.5% in the first quarter of 2024. But overall sentiment remained unfavorable after RBNZ Governor Adrian Orr told a parliamentary committee on Monday that the current inflation rate of 4.7% is still too high and money rates should stay at restrictive levels. The statement came amid the central bank’s preparations for its first policy meeting of the year in late February.

The NAB Australia Business Confidence Index rose to 1 in January 2024 from an upwardly revised zero in the previous month but remained below its long-term average. The improvement in the index was mainly in manufacturing and construction, while sentiment in wholesale and retail trade declined. The Westpac-Melbourne Institute of Australia’s consumer sentiment index jumped 6.2% to 86 in February 2024 from 81 in January, the highest in 20 months, amid lower inflation and optimism that the Reserve Bank of Australia has ended its tightening campaign.

S&P 500 (US500) 5,021.84 −4.77 (−0.10%)

Dow Jones (US30) 38,797.38 +125.69 (+0.33%)

DAX (DE40)  17,037.35 +110.85 (+0.65%)

FTSE 100 (UK100) 7,573.69 +1.11 (+0.02%)

USD Index  104.13 +0.05 (+0.05%)

• – Japan Producer Price Index (m/m) at 01:50 (GMT+2);
• – New Zealand Inflation Expectations (m/m) at 04:00 (GMT+2);
• – UK Average Earnings Index (m/m) at 09:00 (GMT+2);
• – UK Claimant Count Change (m/m) at 09:00 (GMT+2);
• – UK Unemployment Rate (m/m) at 09:00 (GMT+2);
• – Switzerland Consumer Price Index (m/m) at 09:30 (GMT+2);
• – German ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Eurozone ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – US Consumer Price Index (m/m) at 15:30 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.