How Markets Will React After Wednesday’s US Inflation Data

Stock market investors are showing caution today as they wait for more data on US inflation, due on Wednesday 12 January.

US futures began little changed but are now in the red, with the S&P500 down 0.20%. The Euro Stoxx 50 down 0.43% as market participants remain cautions on risk assets.

In addition to US inflation numbers, market participants will also be watching the progress of the omicron variant this week even as fears recede that the latest mutation would lead to another shock to world economic output.

Is ‘delatcron’ a scariant for the stock market?

However, news that first emerged last Friday of yet another variant which was though to be a combination of delta and omicron, dubbed deltacron, and discovered in Cyprus, may have been a false alarm.

Leondios Kostrikis, who is the professor of biological sciences at the University of Cyprus and head up the country’s molecular virology lab, announced he had discovered the new strain. He has rejected criticism from other scientists who say that it is more likely to be a result of contamination than a new strain.

25 cases of the alleged new strain have been discovered in Cyprus and Kostrikis says he will divulge more information to justify his conclusions today.

But the Cypriot authorities say that ‘deltacron’ is unlikely to have spread or to be able to outcompete omicron and does not pose a threat. The World Health Organisation is yet to comment.

There are signs that the omicron wave might be peaking in  the UK, although hospitalisations are still rising. Meanwhile in China a mass testing campaign is being rolled out Tianjin as the country struggles to maintain its Zero Covid policy. Tianjin is a major port.

US inflation set to rise to 7%, wage growth jumps

US inflation is expected to rise from 6.8% to 7% on a year on year basis but the monthly gain to come down from 0.8% to 0.5%.

If the numbers come in above 7% it could add fuel to the sell-off in risk assets and a further surge in yields.

There is growing concern that the US Federal Reserve is falling behind the curve on controlling inflation.

Those fears were brought into stark relief on Friday. Although the jobs build was below expectations, coming in at 199,000 instead of the 450,000 predicted, wage growth accelerated. The unemployment rate fell  from 4.1% to 3.9%.

US workers’ wages grew at a rate of 4.7% as against the 4.2% forecast by economists. Those numbers have stoked worries that the tightening labour market will see wage demands to keep up with inflation becoming embedded, leading to spiralling costs for firms and higher prices for consumers.

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Goldman Sachs now expects four rate rises from Fed

Goldman Sachs now expects the Fed to increase interest rates four times as opposed to three as previously thought.

In a research note to clients, Goldman analyst Jan Hatzius wrote: “With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike. We continue to see hikes in March, June, and September, and have now added a hike in December.”

European equity markets were muted at the start of the week, as investors held back from strong bets ahead of US inflation data later in the week that may strengthen the case for tighter monetary policy in the world’s largest economy.

The week ahead will likely see a continuation of the rotation out of richly valued tech stocks and into cyclicals that will benefit from the continued economic recovery, such as banks and industrials.

In the eurozone inflation is running at 5% and their are similar fears that the European Central Bank may have taken its eye off the ball as far as the need for a move on monetary tightening goes by placing too much weight on dangers of undermining the economic recovery.

ECB behind curve on inflation too, US 10-year at 1.79%

The ECB is now under increasing pressure to end its emergency asset purchases introduced to counter the Covid pandemic as well as its more longstanding bond buying programme.

Elsewhere, stocks moved forward in Asia, with Chinese stocks paring some of the losses from last week. Hong Kong’s Hang Seng closed 2.5% higher, making up for much of the 3% loss suffered last week.

Yields on US government debt continue to rise. The benchmark 10-year Treasury bond is up 3 basis points at 1.798%, which is a 12-month high. Bond yields move inversely to bond prices and inflation expectations are pushing up the cost of borrowing.

German government bond yields have turned positive for the first time in three years.

Gold has ticked higher at $1,801, while crude oil has fallen back around 0.15% on major benchmarks.