Markets Wrap (1H February)
A hot inflation reading in the US
In January US consumer prices have increased by 0.3% MoM (0.2% prior) and 3.1% YoY (3.4%). Headline inflation was expected to decrease to 2.9%, leading to a correction of market expectations. Further, core inflation was unchanged at 3.9%. While energy and core goods prices have continued to decline, rent prices and transportation services have led the price increase.
Market abandoned hopes for a rate cut this spring
Just a few weeks ago the market was still fully pricing in a rate cut for both May and June. Now the wagers have moderated quite a bit as inflation persists and central banks push back. The first cut is expected only in June and even that is not a certainty as the probability for the rates to stay put is at 25%. A similar story is unfolding in the eurozone, where the first decrease in policy rates is foreseen at the start of summer.
It's all about the rates for the currencies too. When comparing US and eurozone, expectations for Fed have turned more hawkish relative to ECB (Figure 3). This change in outlook has strengthened USD against EUR.
Last year's winners are surging further
Japanese and US equities were among the best performing markets last year and the stellar performance has continued in to 2024. Japan has been the best performing equity market this year, Nikkei 225 has surged 15% and is inches away from surpassing its 1989 highs. Japanese markets were bolstered by dovish central bank policies and investor inflows from battered Chinese markets. US equities have also continued it stellar performance and broke through the 5,000 mark. Strong equity earnings and data suggesting the economy is still strong has upheld high US equity valuations.
Diesel prices soaring
Since the start of the year gasoil prices have risen around 15%, while other benchmarks such as WTI crude oil or gasoline prices have increased comparatively less at ~9%. This has led the diesel's premium over crude to seasonal highs and significantly higher than the average prices over the last 5 years. A tight market has been developing in Europe with a combination of low European distillate production and the cut off of Russian imports. Now the disruptions have exacerbated further with seasonal plant maintenance closures and increasing shipping rates due to disturbances in the Red sea.
Trump takes the lead in the presidential race as Biden struggles
While the Republican primary elections have not ended yet and Nikky Haley still thinks she has a chance, it’s all but certain that Donald Trump will be the GOP nominee. Furthermore, Trump has taken the lead in the race against the Joe Biden. It seems the ongoing legal problems did not hinder Trump's popularity and may even helped him stay in the spotlight. At the same time, questions about Biden's health caused the incumbent to lose some points and started speculations that Democrats could choose a different nominee, namely Gavin Newsom or Michelle Obama.
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