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US Futures cautious ahead of key inflation report amid Fed rate cut speculation


US Futures cautious ahead of key inflation report

At the beginning of a week filled with significant data releases, US equity futures indicated a cautious approach ahead of a crucial report on US inflation. This report is considered a litmus test for the stock market's resilience, which is currently buoyed by optimistic bets. Investors are hopeful that Jerome Powell, the Federal Reserve Chair, and his team might shift towards a more lenient policy stance soon. This anticipation is set against the backdrop of the market's positive reaction to the Federal Reserve's potential pivot.


The market's anticipatory mood is reflected in the slight decline of 0.2% in S&P 500 futures, whereas Nasdaq 100 futures, which are more sensitive to changes in interest rates and have a substantial technology sector weighting, remained unchanged. Concurrently, the yield on the 10-year Treasury note showed no movement, indicating a wait-and-see approach among investors.



The Consumer Price Index (CPI) report, scheduled for release on Tuesday, is seen as a critical factor in shaping the Federal Reserve's mid-year policy decisions, particularly regarding interest rate cuts. The tone of policymakers has recently appeared dovish, fostering a strong market belief, as seen in swaps trading, that a rate cut in June is almost certain. This belief persists despite recent robust employment data, suggesting that the market is heavily weighing this upcoming inflation data.


A scenario where the CPI report reveals an unexpected surge in consumer prices could severely disrupt the upward trends in both the stock and bond markets. This apprehension stems from last month's experience, where similar CPI data led to a significant market pullback. The stakes are even higher with the upcoming report, as it will be the final major economic data before the Federal Reserve's crucial meeting on March 20, potentially influencing their policy decision significantly.


Mark Dowding, the Chief Investment Officer at RBC BlueBay Asset Management, points out the market's preoccupation with anticipating or pre-empting the Federal Reserve's initial rate cut. He suggests that although many are focused on this possibility, he believes that such a policy shift may still be a few months away, indicating a potential gap between market expectations and actual policy actions.



In the realm of currencies, the Japanese yen has shown a remarkable increase, fueled by expectations that the Bank of Japan may begin to increase interest rates. Concurrently, Bitcoin has experienced a significant surge, crossing $71,000, driven by consistent inflows into U.S. exchange-traded funds, signifying a substantial gain of almost 70% this year. On the other hand, the US dollar is witnessing its longest losing streak in nearly four years, which is indicative of shifting investor sentiment in currency markets.


A continued moderation in U.S. price increases would reinforce the narrative of ongoing disinflation, aligning with broader market expectations. This trend is evident despite a decrease in the predicted number of Federal Reserve rate cuts for the year. The February CPI report is expected to show a modest increase in core prices, both on a monthly and yearly basis, with the annual rise being the smallest observed since April 2021, suggesting a gradual stabilization in inflation rates.



Recent comments from policymakers have lent support to the possibility of a softer monetary policy. This was evidenced when the S&P 500 rallied following Federal Reserve Chair Powell's Senate testimony, where he indicated the Fed's proximity to rate cuts. Similarly, remarks by European Central Bank President Christine Lagarde about potential rate reductions in Europe contributed to a boost in the Stoxx Europe 600 Index, reflecting a globally dovish monetary outlook.


The improvement in America's economic landscape, coupled with a decelerating inflation rate, is making it increasingly challenging for market bears to sustain their stance. The few remaining arguments for a bearish outlook include overenthusiastic market positioning, extended technical indicators, and uncertain earnings projections, which may still pose risks to the market's stability.


Michael Wilson, Morgan Stanley's chief U.S. equity strategist and a notable bearish voice on Wall Street, cautions that the absence of a strong economic recovery in the second half of the year could pose challenges, particularly for market sectors sensitive to economic performance as we read in Bloomberg. This is especially pertinent if the Federal Reserve postpones rate cuts beyond current market expectations. Wilson predicts a potential 12% decline in the S&P 500 for 2024, setting a target that reflects a cautious outlook amidst uncertain market conditions.



In Europe, the stock market experienced a slight downturn, with the benchmark index falling by 0.4%. This decline was led primarily by the basic resources sector, which suffered due to a decrease in demand for iron ore from China, highlighting the interconnectedness of global markets and the influence of major economies like China on different market sectors.


In the commodities market, oil prices remained subdued as investors awaited reports from OPEC and the International Energy Agency (IEA), which are expected to provide insights into the global demand outlook. Meanwhile, gold prices hovered near record levels, influenced by the market's anticipation of the Federal Reserve's upcoming policy decisions and the broader implications for the economy and financial markets.


11.03.2024



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