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MARKETS

US stocks ended Tuesday with mixed fortunes as Wall Street navigated through calmer waters following the release of the latest inflation figures and simmering reports of President-elect Donald Trump's tariff strategy. The Producer Price Index (PPI) for December provided a glimmer of hope, rising less than expected and hinting at a potential easing of inflationary pressures. Concurrently, a Bloomberg report unveiled that Trump's team is contemplating phased tariff increases, using emergency legislation to ratchet up import duties by 2%-5% monthly in a bid to wrest concessions from trading partners.

This nuanced approach to tariffs, designed to showcase Trump’s "Deal Maker in Chief" credentials, may mitigate the initial inflationary shock but sets the stage for a drawn-out trade skirmish that could keep the markets on edge. Such a strategy suggests a long haul of tactical tariff adjustments, weaving a web of uncertainty that could keep market volatility simmering and complicate the inflation landscape for years.

Over the last two days, the financial landscape has seen a momentary calm: bond markets have steadied, the dollar's meteoric ascent has paused, and global stocks have found some much-needed breathing room. Yet, the relief is shadowed by the persistent spectre of elevated "term premium" in the bond markets, keeping 10-year US Treasury yields stubbornly fixed above 4.78%. Despite Tuesday's inflation report coming in cooler than anticipated, the stranglehold of high yields persists. All eyes are now on Wednesday's consumer price index update, a pivotal indicator that could amplify or temper the prevailing inflation worries.

Yesterday's Producer Price Index (PPI) release, while perhaps overshadowed by tonight's highly anticipated Consumer Price Index (CPI) data, should not be overlooked, especially if consumer price growth exceeds expectations. Remember, the PPI is intrinsically linked, sharing much of the same economic DNA, as a leading indicator for the Personal Consumption Expenditures (PCE) prices—the inflation measure directly targeted by the Federal Reserve. Disregarding its implications might mean missing a critical piece of the economic puzzle that shapes the Fed's actions.

The S&P 500 inched up by 0.1%, while the tech-heavy Nasdaq slipped by 0.2%. The Dow Jones Industrial Average climbed 0.5%, securing back-to-back gains amidst a backdrop of cautious optimism and looming uncertainties. As investors brace for the next wave of consumer inflation figures and a fresh round of corporate earnings, the financial landscape remains delicately poised between hopeful moderation and persistent inflationary pressures.

January's start hasn't showered warmth on equity investors' buoyant spirits.

Global shares have dipped around 1% since the turn of the new year, with US stocks echoing this downtrend. This isn't entirely surprising given that US equities often set the tempo for the global market. Despite the sluggish start, it's still early days—not just in the year but even in the month. January traditionally beckons the highest investment flows, with traders rearing to go on a fresh profit and loss slate and often more inclined to dial up their risk appetite.

However, this January carries a heavier load of uncertainties. With a raft of unknowns from the incoming administration's economic strategies and dim prospects for rate cuts in 2025, Wall Street seems to have collectively slammed on the brakes, adopting a wait-and-see approach amidst the prevailing market caution.

ASIA OPEN

The temporary respite in the global bond sell-off early Tuesday provided a momentary boost to equities, allowing them to regain some stability. However, the persistent unease on Wall Street, particularly in anticipation of the upcoming U.S. inflation data, might thrust Asian markets back into a defensive stance come Wednesday.

While the slight pullback in dollar and Treasury yields could spell a brief relief for emerging and Asian markets, the limited gains in U.S. stocks suggest that this reprieve might be fleeting. The real test will come with the release of the U.S. CPI inflation numbers, which are set to drop after Asia's markets have closed. This could potentially set the stage for more turbulence in the subsequent sessions.

As the clock ticks down to President-elect Donald Trump's January 20 inauguration, the drumbeat of a looming global trade war and the threat of stiff U.S. tariffs, particularly against China, cast long shadows over global markets. Amidst this tense backdrop, equity futures displayed a mixed tableau: Australia and Hong Kong hovered in a holding pattern, while Japan's markets ticked upwards, energized by a glimmer of optimism. Chinese equities are gearing up for another robust session, riding high on a 2% surge in US-listed mainland shares, fueled by news that Trump's advisors are mulling over phased tariff escalations.

FOREX MARKETS

The dollar retreated from its lofty perch, marking its first decline in six sessions. Twin revelations sparked this shift: a strategic report hinting at gradual tariff implementations and fresh data showcasing an unexpected dip in U.S. wholesale inflation, contributing to a recalibration of extended long-dollar positions at unseen levels since 2019. Hence, the crowded trade makes the dollar extremely sensitive to downside economic surprises.

Now, all eyes are on Wednesday’s critical U.S. consumer price inflation report. Forecasts suggest an uneasy 3% December inflation rate, but when annualized, alarmingly hint at rates edging towards 4%. This unsettling preview starkly contrasts with the Federal Reserve’s late 2024 projections, throwing a cold splash on rate cut hopes and catapulting Treasury yields towards the daunting 5% mark—a stark reminder of the volatile financial landscape that awaits just beyond the horizon.

OIL MARKETS

Oil prices declined from a five-month high as Hamas and Israel reached a tentative cease-fire, cooling off a rally that was previously driven by supply risks from Russia and Iran. Additionally, the market's outlook was further clouded by the possibility of other OPEC+ nations stepping in to compensate for any supply shortfalls that might arise from sanctions. Moreover, the Energy Information Administration's Short-Term Energy Outlook added to the bearish sentiment by forecasting that global oil production growth will likely exceed demand over the next two years, potentially keeping a lid on oil prices. Despite this, the consensus view that supply will outstrip demand in 2025 meant the market impact was not as pronounced.

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