Markets see little change ahead of key US inflation report

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

All three major US equity indices finished in the green on Monday, and passed the worst week for the year so far, as investors looked for clues on the interest rate path in Fed officials’ latest comments while awaiting the upcoming US inflation report due today. The Dow and S&P 500 each rose 1.1%, while the Nasdaq 100 added 1.5%. The economic calendar was dormant yesterday, while the Q4 earnings season continued down the backstretch. European equity markets also rose yesterday, with the benchmark Euro Stoxx 50 rallying by 1% to above 4,200, prompted by gains in household goods while energy shares underperformed. Defence companies also got a boost after the Indian Prime Minister said India wants to raise its annual defence exports to $5 billion by 2024-25 from $1.5 billion.  

Summary as at 14.02.2023 

• Asian equity markets mostly rose on Tuesday, as investors assessed data showing Japan’s economy rebounded less than expected in Q4. In Australia, February consumer confidence fell sharply to be back near historic lows due to persistent cost of living pressures and rising interest rates, while business confidence turned positive in January. Shares in Australia, Japan and South Korea advanced, while Hong Kong and mainland China equities fluctuated around the flatline. 
• European equities are set for a muted open and US futures were little changed ahead of US inflation data that could test Fed expectations. 
• Oil prices continued their retreat from over two-week highs this morning after the US announced plans to release 26 million barrels of oil from strategic reserves, countering the impact of Russian output cuts and recovering Chinese demand. The Ceyhan terminal in Turkey, which exports about 1 million barrels of crude per day, also resumed operations after being disrupted by a major earthquake last week. 
• Japanese Prime Minister Fumio Kishida’s government nominated Kazuo Ueda to helm the Bank of Japan on Tuesday in a move likely to pave the way for a gradual paring back of the central bank’s full-bore stimulus. Ueda, a university professor and former BOJ board member with a PhD from Massachusetts Institute of Technology, is Kishida’s surprise choice to replace current Governor Haruhiko Kuroda.  
• The European Commission noted yesterday that the EU economy entered 2023 on a better footing than projected in autumn and lifted the growth outlook for this year by 0.6 pps to 0.9% in the Euro Area, which is now set to narrowly avoid the technical recession that was anticipated for the turn of the year. All countries in the Euro Area are set to grow in 2023, with Germany expected to expand 0.2%, France 0.6%, Italy 0.8%, and Malta 3.1%. Meanwhile, the inflation forecast has been revised slightly downwards compared to autumn, with headline inflation seen falling to 5.6% in 2023 from 8.4% in 2022 and to 2.5% in 2024. 
• US Secretary of State Antony Blinken is considering a meeting with Wang Yi, China’s top diplomat, at a security conference later this week, people familiar with the matter said, in what would be their first face-to-face talks since an uproar over a Chinese balloon led to a new spike in tensions. Blinken and Wang would meet at the Munich Security Conference, which runs Feb. 17 to Feb. 19, provided both sides agree. 
• President Joe Biden has decided to name Federal Reserve Vice Chair Lael Brainard as his top economic adviser, with an announcement coming as soon as Tuesday, people familiar with the matter said. The president’s selection of Brainard to replace outgoing NEC Director Brian Deese places her alongside another high-profile former Fed official, Treasury Secretary Janet Yellen, as a crucial player on economic policy amid the continuing battle with inflation and as Biden prepares for a likely re-election campaign.   
• For the first time in a long time, shares and bond markets are flashing divergent signals on the economy and future Federal Reserve policy. Tuesday’s inflation report will go a long way in determining which one is right. Bond markets have been cautious. Yields on two-year Treasuries have soared by more than 30 basis points over the past two weeks as traders grow wary of the Fed’s hawkish messaging ahead of the latest reading on consumer prices. Shares have been less worried. Amid the re-rating in the debt market, the S&P 500 has climbed almost 1.5% over that time.