Falling probabilities of interest rate cuts in the spring are weighing on stock indices

Economic news from the US on Wednesday was hawkish for Fed policy and bullish for the US dollar, which pressured the indices. Retail sales for December rose by 0.6% m/m, beating expectations of 0.4% m/m. Manufacturing production for December rose by 0.1% m/m, stronger than expectations of no change. The Fed’s Beige Book also supported the dollar as it stated that most Fed districts reported little or no change in economic activity, and overall, their firms’ expectations for future growth remain positive.

ECB President Lagarde said yesterday that policymakers need more evidence before they can be confident that consumer prices are under control. Lagarde also indicated that the ECB’s first-rate cut is likely to come in the summer, not in the spring as economists had expected. Knot, a spokesman for the ECB’s governing council, said yesterday that markets are getting ahead of themselves and the ECB needs to see a turnaround in wages before the Bank will consider an interest rate cut.

The UK Consumer Price Index unexpectedly rose to 4.0% y/y in December from 3.9% y/y in November, beating expectations of 3.8% y/y. The core CPI for December was unchanged from November at 5.1% y/y, exceeding expectations of 4.9% y/y. The core and core inflation measures delivered an upward surprise, but temporary price pressures are unlikely to have an impact on the Bank of England as a more detailed report showed that the high inflation reading for December did not indicate an overall rise in the prices of the components that make up the core index, indicating continued progress in bringing inflation down to 2%.

Yesterday, Shell announced the cessation of all shipping through the Red Sea in response to recent Houthi attacks on marine vessels. Houthi rebels continue to attack ships in the Red Sea off the coast of Yemen. Geopolitical tensions in the region will contribute to higher energy prices, as well as inflation in general, as carriers are forced to divert ships through Africa, increasing transportation and insurance costs, which will ultimately lead to higher commodity prices for the end consumer.

Asian markets were predominantly down yesterday. Japan’s Nikkei 225 (JP225) was down by 0.40%, China’s FTSE China A50 (CHA50) lost 2.34% on Wednesday, Hong Kong’s Hang Seng (HK50) decreased by 3.71% on the day, and Australia’s ASX 200 (AU200) was negative by 0.29% on Wednesday.

Australia’s labor market contracted slightly in December. Total employment fell by 65,100, weaker than expectations of a 17,600 increase and largely reversing the 61,500 increase seen in the previous month. The participation rate (the percentage of the working-age population in the labor force or looking for work) fell to 66.8% from a record high of 67.2% in the previous month. Despite this, the unemployment rate remained unchanged at 3.9%, its lowest level in 50 years. The Reserve Bank of Australia (RBA) predicts a possible cooling in the labor sector but has no plans to cut rates anytime soon. The RBA is almost 100% likely to keep rates unchanged at its February meeting.

ANZ economists are leaning towards the Reserve Bank of New Zealand (RBNZ) starting to cut the official money rate in August. Consecutive 25 basis point rate cuts are expected starting in August, bringing the rate down to 3.5% (from 5.5%) within 12 months. ANZ’s current forecasts are for inflation to return to the target range of 1% to 3% by the September quarter and for unemployment to pass the 5% mark and continue to rise.