Take Five: Rethinking those rate cut bets

(Reuters) – A flurry of data should give markets a clearer sense of how fast inflation is falling globally, as turmoil in the Red Sea and oil price gains renews angst over price pressures.

U.S. banking giants kick off the reporting season and crypto markets look set for more volatility.

Here’s a look at the week ahead in global markets from Rae Wee in Singapore, Ira Iosebashvili and Lananh Nguyen in New York, and Naomi Rovnick and Tom Wilson in London.

1/ INFLATION: CHEER VS FEAR

U.S. stocks and bonds soared in late 2023 in anticipation of Federal Reserve rate cuts this year. Inflation data on Jan. 11 could show whether those expectations are warranted.

Gradually cooling inflation has increased bets that the central bank could begin lowering borrowing costs as early as March. Signs that inflation remained subdued in December would likely support that view – though a sharper-than-expected decline could also stoke fears that recent Fed rate increases are starting to weaken the economy.

Conversely, a report showing that consumer prices are rising again could spark concerns markets may have underestimated how long it could take for the Fed to defeat inflation. Economists polled by Reuters expect the report to show a monthly 0.2% gain in consumer prices versus a 0.1% rise in November.

2/ TROUBLED WATERS

Markets have been looking to oil prices for signs the Israel-Hamas dispute will push global inflation higher, but with expectations of heavy supply, oil does not tell the whole story.

As transport groups re-route vessels away from the Red Sea, retailers face the biggest shipping upheaval since COVID-19 stymied the freight industry in 2020.

The result could be Western retailers waiting longer for goods to arrive from China, with shortages pushing up prices, trade analysts say. The British Retail Consortium has said rising costs could reverse a trend of moderating grocery price inflation.

Markets, more focused on relatively moderate oil prices, have so far shown limited concern about Red Sea shipping. But investors would be wise to monitor freight costs for signs that the battle against inflation is not over.

3/ INFLATION INVASION

    Policymakers across Australia, China and Japan face critical inflation readings likely to provide a sense of whether they will have more, rather than less work in 2024.

The Reserve Bank of Australia, which is expected to join a rate-cut bandwagon later this year could find some relief if there is a slowdown in November’s inflation.

In contrast, a pick up in consumer prices in Tokyo, a leading indicator of nationwide inflation trends, could cheer those betting on a Bank of Japan (BOJ) policy pivot. Such expectations sent a battered yen surging 5% versus the dollar in December.

Achieving its 2% inflation target “sustainably” is the pre-condition for BOJ officials to ending negative interest rates.  

    In China, figures on Friday will give further clarity on whether deflationary pressures continue to mount in the world’s second largest economy.

4/ BANKING ON THE FED

U.S. banking giants kick off earnings with JPMorgan Chase (NYSE:), Bank of America and Citigroup due to report fourth quarter and full-year results on Jan. 12.

Top lenders brought in more income from interest payments in 2023 as the Fed raised rates, helping banks to offset a protracted slump in dealmaking revenue in Wall Street divisions.

Consumers are also in focus with household finances having remained largely healthy since the pandemic, but some customers, particularly those on lower incomes, are starting to fall behind on payments in greater numbers.

Commercial real estate will continue to be a drag meanwhile. Banks have set aside money to cover souring office loans last year. As many employees continue to work remotely or in hybrid arrangements, office owners who borrowed money to finance their buildings are likely to face further strains.

5/ CYRPTO’S ETF HOPES

kicked off the new year as it finished 2023 – with sharp gains after investors bet on possible approval by U.S. regulators of exchange-traded spot bitcoin funds.

The biggest crypto token topped $45,000 for the first time since April 2022 on bets that such applications will get the nod from the Securities and Exchange Commission soon.

Market players say the SEC’s decision may be imminent and could usher in a new wave of capital to crypto. Such hopes helped propel bitcoin in 2023 to yearly gains of more than 155%.

Yet ever-volatile bitcoin has already trimmed its 2024 gains. Doubts linger, some analysts say, over how much demand will exist for any bitcoin ETF – and whether approval is already priced in.

(Graphics by Vineet Sachdev, Pasit Kongkunakornkul, Sumanta Sen, Kripa Jayaram and Riddhima Talwani; Compiled by Karin Strohecker and Dhara Ranasinghe; Editing by Barbara Lewis)