Risk assets are having a more reserved start to 2024, with investors mindful of not wanting to get too far ahead of things regarding rate cut expectations from the Fed just in case the macro data starts to tell a different story. If upcoming CPI and PPI from the US comes in on the softer side of the ledger, then this would likely provide a green light for the rally to resume. However, if the inflation prints fall into the ‘sticky’ category, this could prompt both a rethinking and a repricing regarding the extent of policy easing which may come to fruition from The Fed in 2024. Thus, investors are ‘marking time’ ahead of US CPI data which will provide the next sign post for rate expectations and in-turn, market sentiment.
It's early days, but so far bond yields and the USD are having a much better month than they did in December. Some of this upward price action is a natural bounce after being sold-off at the backend of 2023, while some of the momentum is fuel led by the NFP results from last week. While the FOMC is expected to loosen monetary conditions this year, it’s likely that other central banks around the globe could follow suit and it is this potential scenario which is underpinning the USD from a yield differential perspective. With the 10-year bond yield managing to maintain a hold on the 4% level, the Dollar Index has been in consolidation mode around the 102.50 level.
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This consolidation phase for the USD has effectively applied the brakes to the gold price. The spot gold contract has pulled back from its2024 highs above $2060 in large part because of the resilience shown by both the greenback and bond yields in January so far. Spot gold was trading at $2030during Asian trading hours on Wednesday, with any potential move back beyond$2050 dependent upon the USD losing some of its current traction. Any tepidness in the US CPI data could spark a move to the upside in the precious metal. Though if 2023 taught us anything, it was that the path of inflation is not a linear one, so it’s far from a given that the current rate of disinflation will be maintained.
The oil price continues to interact with the latest Red Sea shipping developments. However, the price took a turn lower despite escalations not easing, with Maersk again pausing routes in the region after another attack. Risk premium has been removed from the oil price even though there is no sign of a let-up of tensions and potential supply disruptions. But so longas any disruptions remain a ‘potential’ rather than a reality, it seems that markets are hesitant to go long on oil at the moment following the nearly 11% fall in the price last year. Energy market volatility was a feature of 2023, could be so again in 2024 given the ongoing conflict happening so close to many major oil producing nations.
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Speaking of inflation, Australia’s November CPI came out today at 4.3% y/y, down from the 4.4%expected and the 4.9% from the prior October reading. Pleasingly for the RBA, it was the slowest rise in in the rate of inflation on an annual basis since January2022. This November CPI result adds to the case for a February interest rate ‘hold’ from the RBA, but the central bank will be waiting for confirmation of the downward trend when the December Quarter CPI is released later this month. The AUDUSD rate had a muted response to the data, with the pair continuing to trade just shy of the 0.67 level.
Elsewhere, the oil market continues to swing around geopolitical tensions and Red Sea shipping headlines. The price clawed back some ground overnight on news of Libya oilfield disruptions, though there is some lingering weakness thanks to Saudi Arabia cutting the price offered to Asian customers. Anytime that we see price cuts of this nature is usually indicative that the demand picture is not particularly great.
Asian equity markets were mostly restrained to start the session on Wednesday, with the exception of the Nikkei which has made a spritely start to 2024 having hit multi-decade highs. But for the most part, markets are in ‘wait and see’ mode ahead of the all-important US inflation data.
