US Open Note – Inflation hits its fastest pace in four decades

Powell calms the markets

Fears that the US economic expansion could be jeopardized by tighter monetary policy have been alleviated for now, as the Fed Chair Jerome Powell reassured investors that the central bank would bring down inflation without derailing the US economic recovery.

Powell also avoided a comment on the timing of rate hikes and stressed that no decision has yet been made regarding the reduction of the Fed’s balance sheet. After his hearing, not much has changed regarding market expectations, with three rate hikes fully priced in for 2022, together with a decent probability for a fourth.

CPI data came out ‘hot’; dollar weakens

US inflation has closed 2021 near its highest level since 1982, with the headline CPI rate coming as expected at 7.0%. The core CPI for December rose to 5.5% y/y from 4.6% and by 0.6% m/m versus forecasts of 0.5%, which could solidify market expectations for a fourth rate hike. However, the 10-year Treasury yield has failed to capitalize on the back of hotter-than-expected core inflation reading, pushing the dollar lower against a basket of currencies.

In the rest of the FX arena, the Australian and Canadian dollar have emerged as the undisputed winners, edging higher against the greenback and the euro due to rapidly increasing oil prices. Looking ahead, January could prove to be a stellar month for the loonie, as market participants appear optimistic about a BoC rate hike later this month. Moreover, the perceived risk-on sentiment continues to cast a shadow over the Japanese yen, which resumed its losses against the euro and the dollar.

US stocks headed for opening gains

On Tuesday, US stocks finished the session firmly higher as investors weighed comments from Fed Chair Jerome Powell. The S&P 500 index rose by 0.9% snapping a five-session losing streak, while investors appeared to have bought the dip on the recently pressured tech stocks, pushing the Nasdaq 100 higher by 1.4%. Eight of the eleven S&P 500 sectors finished the session in the green, with energy companies leading the gains on the back of surging oil prices.

Futures for the major US indices are pointing for a higher opening on Wednesday as investors shift their attention towards the upcoming earnings season. A strong growth in earnings could offer the much needed ‘fuel’ for the stock market, driving US shares higher. Moreover, oil continues its advance, driven by tight supply and easing fears regarding Omicron’s impact on the economic recovery.

In Europe, the Stoxx 600 index is in positive territory, while Hong Kong’s Hang Seng index closed 2.79% higher. Chinese shares surged after inflation data in the country came out lower-than-expected, increasing calls for further monetary easing by the PBOC to cushion the increasing slowdown fears in the world’s second largest economy.

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