Futures speculation on rate cuts, Asia market mixed
Asian market mixed, US CPI up 0.3%. UK CPIH, CPI steady in Jan 2024. Market reaction to US inflation report, futures seeing max 92 bps rate cuts in 2024.
UK Economic Data and Trends
In the UK, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) remained unchanged at 4.2% in January 2024, the same rate as in December 2023, and down from a recent peak of 9.6% in October 2022. The owner occupiers’ housing costs (OOH) component of CPIH rose by 5.4% in the 12 months to January 2024, up from 5.3% in December 2023. The Consumer Prices Index (CPI) also remained unchanged at 4.0% in January 2024, the same rate as in December 2023, and down from a recent peak of 11.1% in October 2022.
Asian Market Performance
In Hong Kong, the Hang Seng index surged 0.8% to 15,879.38 after opening lower, while markets in mainland China remained closed all week. In Japan, the benchmark Nikkei 225 shed 0.7% to 37,703.32, while Australia’s S&P/ASX 200 dipped 0.7% to 7,574.70, and South Korea’s Kospi fell 1.1% to 2,620.42. India’s Sensex gained 0.2% and the SET in Bangkok lost 0.6%.
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US Economic Indicators and Federal Reserve Projections
In the US, the consumer price index rose 0.3% from December to January, up from a 0.2% increase the previous month. Compared with a year ago, prices were up 3.1%. Even after the surprising inflation report, the likeliest outcome is still for the US economy to manage a perfect landing and avoid a painful recession as inflation cools, according to Alexandra Wilson-Elizondo, co-chief investment officer of the multi-asset solutions business in Goldman Sachs Asset Management. Fed officials have said they were penciling in three cuts to rates this year, as inflation hopefully cools toward their 2% target from its peak above 9% two summers ago. Earlier, traders were forecasting as many as six cuts in 2024. Now, they’re largely betting on three or four cuts.
Oil Market and Currency Trading
In the oil market, benchmark US crude fell 4 cents to $77.83 a barrel, while Brent crude, the international standard, rose 2 cents to $82.79 a barrel. In currency trading, the US dollar was hovering above 150 Japanese yen, falling to 150.59 yen from 150.86 yen. In other currency trading, the euro cost $1.0700, little changed from $1.0712.
Economic Reactions and Speculation
The scale of the day’s market reaction to the US inflation report was significant, with almost a full quarter-point taken out of market expectations for Fed easing this year. Even though that’s settled back a bit early on Wednesday, futures now see no more than 92 basis points (bps) of rate cuts in 2024.
There was as much as 150 bps priced little more than a month ago. The chances of a first move as soon as March have now been wiped to as little as 1-in-10. It’s 50-50 for May and a quarter point cut is now not fully discounted until the Fed’s June 12 meeting. In Europe, a sub-forecast reading for British inflation last month helped calm global markets a touch and encouraged some hopes the US CPI quirk was a one-off.
But there is a chance now that, instead of markets bracing for a possible rate cut at the March 20 meeting, they will instead be speculating about whether Fed policymakers will raise their “long run” forecasts for the policy rate – or so-called “neutral rate” projections.
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