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Andreas Zanin
Analysis, Market Analysis | January 12, 2024

JASPER’S MARKET SQUAWK 12-01-2024

Markets Eye March Cut Despite Hotter CPI

Markets gyrate with investors convinced of a March cut and Fed funds futures pricing in less monetary easing for 2024. The 10-year yield fluctuated, sticking around 4%.

Chart: EURUSD

Key Factors for Today

  • Slower Core Inflation Growth Sustains March Rate Cut Expectations
  • Lagarde Suggests Rate Peak, with Cuts Tied to 2% Inflation Target
  • US-UK Air Strikes After Iran Seizes Tanker, Pushing Oil Prices Higher
  • Deflation Hits China as CPI Falls, PBOC Poised to Stimulate Economy

Inflation Persists, Yet Core Rates Keep March Hopes Alive

CPI inflation came in hotter than expected at 3.4% from 3.2% expected, tempering expectations for a March rate cut. However, Core inflation rose below 4% to 3.9% at the slowest pace since May 2021, suggesting the ongoing disinflation narrative remains intact, with investors still hoping for a March cut. Despite most officials expressing hawkishness following the report, Fed’s Goolsbee said inflation was “pretty close” to expectations and saw progress for rate cuts. The dollar index initially climbed to 102.40 but then slid to 102 for a mixed session, leaving behind support at 101.60.

ECB Signals Rate Peak, Awaits Inflation Drop for Cuts

ECB’s President Christine Lagarde said that interest rates have likely peaked but will start to come down only if inflation has fallen to 2. While she failed to provide clues on timing, Croatia’s Governor Boris Vujcic said the ECB could cut before May if inflation falls fast. The ECB President played down concerns arising from the Suez and Panama Canal but warned of a Trump re-election “threat”. Meanwhile, weaker growth could put pressure on public finances and government debt on an upward path, according to S&P Global Director Karen Vartapetov. Recent data saw that debt sales helped drive overall government and debt sales to record highs. EURUSD traded mixed on lack of regional data, failing to reach 1.10 or slide to 1.09.

Oil 2.15% Higher as Geopolitical Tensions Escalate in the Gulf

Oil prices rose 2.15% to $72.75 a barrel as the US and UK carried out air strikes targeting Iran-backed Houthi rebels in Yemen after Iran seized a tanker in the Gulf of Oman in retaliation for a US seizure of its tanker last year. WTI is attempting to move past yesterday’s peak at $73.80 and toward $75 on improving Chinese oil imports. China imported 11.28 million barrels of crude oil per day in 2023, up 11% from the previous year and a new record high. Failing to reclaim the top could see bears face pressure to $72.15/b.

China’s CPI Dips, Signaling Need for Increased Support

Consumer prices in China fell 0.3% year-on-year in December, driven by weak demand at home and abroad. Factory gate prices also declined 2.7% year-on-year due to persistently lower commodity prices. The People’s Bank of China has signalled using policy tools to boost credit growth and support the economy as the country has been experiencing deflation for three consecutive months, the longest stretch since 2009. USDCNY didn’t badger much following the two prints, currently consolidating in a tight range between 7.16 and 7.19.

On The Docket

  • UK GBP
  • UK Industrial Production
  • UK Manufacturing Production
  • US PPI
  • Fed Kashkari Speech

FX 1-Day Relative Performance (USD)

  • Aussie and Kiwi 0.21% and 0.13% higher
  • Euro 0.03% up, Pound leads at 0.10%
  • Loonie 0.13% higher, Franc 0.02% down
  • Japanese yen 0.10% into positive
  • Gold 1% higher, Silver leads at 1.45%
  • WTI and brent soar 2.35% and 2.25%
  • Natural gas 2.55% in the green zone
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