Pre Asia Open: Coming Off Another Week Of Muddled Macro Messages


Could the "beefy" Producer Price Index (PPI) data potentially catalyze into a short-term rally capper? 

Despite facing a series of challenging economic releases in the United States last week, including higher-than-expected Consumer Price Index (CPI) and PPI readings, as well as unexpected weaknesses in retail sales, industrial production, and housing starts for January, the S&P 500 managed to reach a new high by Thursday's close and ended the week flat. Similarly, the MSCI World Index also achieved new highs.

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That said, market sentiment largely shrugged off the short-lived dip following the CPI release, buoyed by a positive earnings outlook and interpreting the softness in retail sales as a factor that could sustain hopes for Federal Reserve rate cuts. Even though Treasury markets experienced a brief sell-off post-CPI, they largely recovered, partly due to a series of softer growth indicators and reassuring statements from Federal Reserve officials. Indeed, it was another week of muddled macro messages. 

Fixed-income markets bore the brunt of the meaty CPI partly due to ongoing supply concerns. Still, in a punchy inflation environment, many traders have had to recalibrate their rate-cut expectations significantly in response to the data.

According to Fed funds futures, the probability of a March rate cut is now less than 10%, with the likelihood of a May cut standing at under 30%. This marks a significant scaling back from earlier expectations, which had priced in six quarter-point rate cuts in 2024 at the beginning of the year, compared to just over three cuts today.

More worrisome, however, was the PPI overshoot, which was entirely attributable to the services gauge, which rose 0.6%. On the goods side, indexes for food and energy both fell from December. However, this scenario may not sit well with the Federal Reserve, especially considering Jerome Powell's concerns that services may not carry the baton once the disinflation effect of falling goods prices dissipates.

In summary, while recent economic data releases have presented challenges, market optimism persists, supported by upbeat earnings trends and hopes for Federal Reserve rate cuts. However, investor concerns regarding inflation dynamics, particularly in the sticky services sector, and the dramatic fall in US retail sales could resurrect stagflation fears. 


Even though macro market indicators presented a mixed picture, resulting in sideways trading for crude contracts most of the day, geopolitical concerns catalyzed a rally in global benchmarks during US Friday afternoon trading.

Geopolitical tensions escalated following another attack on commercial shipping in the Red Sea by Houthi terrorists on Thursday, as well as a new military offensive launched by the Israel Defense Forces in southern Gaza in Rafah. These developments spurred modest gains in Brent and WTI prices as investors reacted to the heightened geopolitical risks.

 The market outlook for the first quarter provided by the International Energy Agency (IEA) was bearish, in contrast to the Energy Information Administration's (EIA) Short-term Energy Outlook released earlier in February. The disparity in forecasts contributed to market uncertainty.

 Additionally, the Paris-based agency anticipates a balanced oil market for the first quarter despite production cuts by OPEC+. This outlook contrasts with the EIA's projection of a 100,000-bpd drawdown from global oil supply in the first quarter.

Overall, geopolitical tensions, supply-demand dynamics, and conflicting forecasts from oil think tanks have contributed to volatility in the oil markets, with investors closely monitoring developments for potential impacts on prices and market sentiment.


FX traders will be closely watching the minutes from the January FOMC meeting and the advance PMI scheduled for release this week for further insights into the direction of monetary policy and economic activity.

In the meantime, USDJPY remains just above 150, but why isn't it higher on the back of the hotter-than-expected US inflation prints?

The market is respecting possible intervention by Japan to limit yen depreciation. And the weaker-than-expected real GDP is not viewed as a game changer for the yen. 

The chatter out of Tokyo is that it may reinforce the determination of the Ministry of Finance (MoF) to prevent further yen depreciation. Similarly, the Bank of Japan (BoJ) will unlikely alter the rate hike prospects in response to the GDP data.

Despite the clear-cut yield advantage, the recent US dollar gain reversal suggests a potential momentum shift. It foreshadows skepticism regarding the US economy's continued strength and perhaps some early election risk. 

Some traders argue that the significant decline in retail sales reported last Thursday may be a more accurate indicator of future economic performance than the inflation readings.

Indeed, the January inflation data, while initially raising concerns, may not be as alarming upon closer examination. CPI inflation has consistently started the year at elevated levels in recent years, even after accounting for seasonal adjustments. This recurring pattern suggests the presence of residual seasonality that has not been fully addressed in the data.

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