Risk assets have started 2024 more cautiously, with investors realizing to avoid going too far ahead on Fed rate cut expectations in case macro data starts to play headwind. If the upcoming CPI and PPI data in the US are soft, then it is likely to give the green light for the market to resume the rally. However, if the inflation data falls into the “stalemate” category, this could prompt a rethinking and repricing of the extent to which the Fed is likely to accommodative in 2024. As a result, investors are trading time for space ahead of the release of the US CPI data, which will provide the next indicator of interest rate expectations and market sentiment.
It’s still early, but so far, bond yields and the dollar have performed much better this month than they did in December. Part of the reason for the price increase is the natural rebound after the sell-off in late 2023, and last week’s non-farm payrolls data fueled the upward momentum. While the Federal Open Market Committee (FOMC) is expected to ease monetary policy this year, it is likely that other central banks around the world will follow suit, and it is this underlying scenario that supports the dollar from a yield differential perspective. The DXY has been consolidating around the 102.50 level as the 10-year bond yield managed to hold the 4% level.
This consolidation phase of the US dollar has effectively put the brakes on gold. Spot gold contracts have retreated from their 2024 highs above $2,060, in large part because both the dollar and bond yields have shown resilience so far in January. Spot gold was trading at $2,030 during Wednesday’s Asian session, and any potential pullback above $2,050 has lost some of its appeal due to the current dollar. Any tepid US CPI data could trigger an upside in precious metals prices. However, if 2023 has taught us, it is that the path of inflation is not linear, so whether the current inflation pullback is far from inevitable is far from inevitable.
Speaking of inflation, Australia’s November CPI was released today at 4.3 y/y%，低于预期的4.4% and 4.9% in October. To the delight of the RBA, this is the slowest rise in annual inflation since January 2022. The November CPI result adds to the RBA’s February interest rate “on hold”, but the RBA will wait for the release of the December quarterly CPI later this month to confirm its downward trend. The AUD/USD exchange rate reacted mutedly to the data, continuing to trade around the 0.67 level.
Elsewhere, the oil market continues to swing around geopolitical tensions and Red Sea shipping headlines. Oil prices recovered overnight on news of the disruption of Libyan oil fields, but remained weak as Saudi Arabia lowered its offers to Asian customers. Whenever we see a price reduction of this nature, it usually indicates that the demand situation is not particularly good.
Asian stock markets were mostly subdued at the start on Wednesday, with the exception of the Nikkei, which opened 2024 with an active start to a multi-decade high. But the market is mostly on the sidelines until the release of important US inflation data.