For the global investors, all eyes will be on the US inflation data to be published by the Bureau of Labor Statistics today. The January 2024 CPI data are scheduled to be released on February 13, 2024, at 8:30 A.M. Eastern Time.
Inflation has been sticky although rolling downwards over the last 18 months. Going forward, the inflation rate over the last 12 months is predicted to fall to 2.9% from 3.4% in January. If predictions are correct, this would be the first time the CPI has gone below 3% in nearly three years.
Vaibhav Shah, Fund Manager, Torus ORO PMS says, ” We expect US inflation to have slowed down last month which should provide some comfort to the US Fed which is closely looking at signs for continuous moderation in inflation. The headline as well core should show signals of a further downward trajectory. Slowing inflation along with reasonable growth should lead to the Fed pivot expectations in Q2CY24.”
Wall Street anticipates the core rate to rise 0.3%, which is the maximum limit of what the Fed considers reasonable in the short run. The 12-month increase in the core rate may also fall to 3.7% from 3.9%. Some analysts estimate the U.S. core CPI to rise 0.3% month on month in January, but remain elevated at 3.8% year on year.
However, a core CPI number of around 0.4% might jolt financial markets. Senior Fed officials have warned Wall Street that interest rate cuts are not likely in the near term unless they are certain that inflation is on track to meet its 2% target.
Wall Street investors predict the first rate cut in May if inflation slows towards the Fed’s 2% goal, despite a 2.6% increase in the PCE index since December.
At the moment, currency markets are being driven by changing expectations about when and how rapidly central banks would decrease interest rates as inflation falls. Strong jobs data earlier this month has effectively ruled out a March Federal Reserve rate drop, with markets instead expecting a move in May.
Market investors, meanwhile, are making hay as the sun shines. But, will the stock market rally leave a bitter taste for investors? “With US equities now trading at 21 times forward earnings amidst lofty interest rates and little demand for cheap hedges against the backdrop of low volatility levels, bulls and bears are wrestling over the sustainability of this rally.
Are we entering a new era of loftier valuations due to rising productivity, increased retail participation, and money shifting from the East to the West? Or is this a bubblicious mania that will end in tears as wild speculation takes over markets?
In the end, only time will tell, but my intuition keeps me in the bearish camp based on a thought process anchored by funds shifting towards reasonable efficiencies over the medium- to long-term rather than chasing unlimited upside, an unsustainable process in my view. Forward earnings’ yields of 4.7% just aren’t enough compensation to own risk assets when considering the plethora of risks on the horizon alongside fixed-income alternatives that pay well more than 5%,” says José Torres, Senior Economist at Interactive Brokers
