Morning overview: Europe-US inflation in focus as Asia observes holiday

The beginning of the week sees a tranquil start in Asia, with China, Japan, Singapore, and several other key centers observing holidays.

Meanwhile, it’s also a public holiday in New York State, coinciding with the Lunar New Year festivities. However, this doesn’t extend to Wall Street, where activity is expected to continue. U.S. stock futures show minimal movement, while European equity and Treasury futures display a slight uptick. The dollar, on the other hand, shows a marginal softening.

Market sentiment is cautious, especially with the impending release of the U.S. consumer price report for January on Tuesday. This report will provide crucial insights into whether the Federal Reserve is likely to implement rate cuts in March or May.

Projections indicate that headline CPI is expected to increase by 0.2% month-on-month, with core CPI rising by 0.3%. The annual CPI figure is anticipated to return to 3.0%, while core CPI is seen slowing to 3.8%, marking its lowest level since mid-2021. Notably, prices for used cars are expected to exert downward pressure, while attention is keenly focused on the trajectory of rent growth.

Estimates for core CPI range from +0.1% to +0.3%, signaling a bias toward the downside. Recent seasonal adjustment revisions are unlikely to significantly impact these projections, with the six-month annualized pace seeing only marginal changes.

Market expectations have shifted away from a March rate cut, with chances reduced to a mere 17%, while the likelihood of an easing in May stands at around 80%. Overall, the market now implies a decrease of 121 basis points for the year, down from 145 basis points just a couple of weeks ago.

The upcoming week features a lineup of eight Fed speakers, including the influential Governor Christopher Waller.

Learn how to trade stocks in bull and bear markets with Top Forex and CFD brokers

Additionally, U.S. retail sales data is on the agenda, with an expected overall decline of 0.1%, offset by a 0.3% increase excluding autos. The control group figures, which correlate with GDP, are anticipated to show even stronger growth at +0.4%, reflecting continued robust consumer spending.

In the UK, CPI data and a Q4 GDP reading are anticipated, with the latter possibly indicating a minor contraction, potentially confirming a technical recession. This could present challenges for the government, especially with two by-elections scheduled for Thursday, where polls indicate potential losses for the Conservative Party.

The Bank of England’s head is scheduled to speak later today, with analysts anticipating a reaffirmation of the bank’s hawkish stance on avoiding early rate cuts.

Despite inflationary concerns, one sector bucking the trend is chocolate, just in time for Valentine’s Day. Cocoa prices surged by 16% last week to hit record highs for nine consecutive sessions.

The upward trend, driven by poor harvests in Cote d’Ivoire and Ghana compounded by the El Nino weather pattern, has resulted in a 40% increase since the year’s beginning. There are apprehensions that global warming could perpetuate this situation.

Looking ahead, corporate earnings reports this week will shed light on cost pressures and margin compression, with notable releases expected from Kraft Heinz, Coca-Cola, Restaurant Brands (owner of Burger King), Airbnb, Marriott, MGM Resorts, Cisco, Lyft, DoorDash, and farm equipment supplier Deere.