Optimism is soaring in the US as inflation softens, propelling the S&P500 towards a record high. The much-awaited US inflation report is expected to play a key role in fueling this optimism. Analyst estimates on Bloomberg suggest that US headline inflation may have increased from 3.1% to 3.2% in December, while core inflation has likely eased from 4% to 3.8% – the slowest pace since May 2021. If the data aligns with or comes in softer than expected, it will likely keep the Federal Reserve (Fed) doves in charge of the market and could further boost appetite in stocks and bonds.
In the currency markets, the US dollar is weaker across the board, with the EURUSD potentially surpassing the 1.10 mark. However, the economic outlook in the eurozone, particularly Germany, remains somewhat gloomy, tempering expectations for extended gains. On the other hand, the USDJPY has rallied past the 145 level as a former Bank of Japan (BoJ) board member stated that the BoJ is prepared to exit negative rates, albeit at a slow pace. Despite this, the upside potential in the USDJPY is limited, with many pointing to the long Japanese yen as the most obvious trade of the year.
Debt issuance is on the rise as investors rush into the bond markets in anticipation of interest rate cuts. Spain recently received a record EUR 130 billion of bids for its 10-year bond, while Tuesday saw a surge in bond issuance in the primary market across Europe. Additionally, the global debt supply is set to increase, with the US, the UK, the Eurozone, and Japan expected to sell a net $2.1 trillion worth of new bonds to finance their 2024 spending plans, a 7% increase compared to last year. The concern, however, is that central banks are reducing their balance sheets and no longer buying new government debt. This over-supply of bonds could soon outweigh the rate cut bets, potentially putting a floor under bond yields and redirecting investor focus to exploding debt levels.
Earnings season is underway, with big US banks set to announce an increase in bad loans. Despite this, overall earnings expectations for S&P500 stocks are encouraging, and early results from semiconductor companies are also positive. Samsung posted its smallest profit decline in the last five quarters, while TSM’s Q4 revenue beat estimates of a decline. The global chip sales, which rose for the first time in over a year, suggest increasing demand for high-performance AI chips, as companies like L’Oreal and Walmart rush to adopt AI for more efficient services. High estimates even suggest that Nvidia’s sales could reach $20 billion in the latest quarter.
In the energy markets, crude oil gains remained limited after the EIA data showed a surprise 1.3-million-barrel build in US oil inventories last week. Oil traders are actively looking to sell at the top, aiming to push the price of a barrel below the $70 mark.
Overall, the stock market is brimming with optimism as inflation softens in the US. The outcome of the much-awaited US inflation report will be crucial in determining the market’s trajectory. Meanwhile, the currency markets, debt issuance, and earnings season are all playing their part in shaping investor sentiment. As the year unfolds, it remains to be seen how these various factors will impact the global financial landscape.
