Equity markets are poised to open a little softer on Wednesday following similar moves in Asia overnight as investors weigh up the latest setback in US data.
The inflation report really needed to over-deliver after the red-hot labour market figures earlier in the month and it simply didn't do it. The trend remains positive but it may be stalling and that won't give the Fed any encouragement to stop raising interest rates.
The next 25 basis point hike was never really in doubt anyway but now markets are factoring in much more, including another in May and a good chance of one more in June. What's more, those rate cuts that were priced in for the end of the year only a couple of weeks ago are no more. Markets are pricing in the possibility of one but the anticipated year-end rate is now significantly higher, as is the terminal rate.
A long way to go
UK inflation may still be far too high but the January CPI report has offered some cause for optimism, slipping faster than expected on both a headline and core basis. The headline number remains above 10% so there's still a very long way to go but favourable base effects and lower energy prices should go a long way in driving this much lower over the course of the year. The BoE may be particularly encouraged by the core decline as this is where we're likely to see stubbornness but we must remember that this is just one release and there will likely be many setbacks over the course of the year.
Correction run its course?
Bitcoin enjoyed a decent rebound on Tuesday despite broader market sentiment being more challenging on the back of the US inflation report. We continue to see resilience in cryptos which is very encouraging despite regulatory headlines not being particularly good. Of course, it's now retraced back to a level that was a notable area of support in late January and early February before it corrected and we'll soon see whether that's become a bearish resistance zone or the corrective move has run its course.
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