On Monday, global shares stabilized while the US dollar strengthened in anticipation of the US inflation data that could influence the outlook for worldwide interest rates. The US air force downing an unidentified flying object near the Canadian border added geopolitical uncertainty.
Equity markets had surged in the first few weeks of 2023 due to optimism about the possibility of inflation and rates reaching their peak, as well as evidence of continuous growth in the US that hinted at a soft landing for the economy. However, the Federal Reserve’s message that the battle against inflation is not over and a red-hot labor market in January dampened that optimism.
Last week, the MSCI All-World index declined by nearly 1.5% after gaining almost 10% in the first five weeks of the year. The index was flat at 646.59 points on the day. This week, the U.S. markets’ short-term direction may be affected by consumer price and retail sales data, and it remains to be seen if inflation continues to decrease in January.
How US economy will move forward in 2023?
Forecasts indicate that headline and core consumer prices will rise 0.4% this month, and sales will rebound by 1.6%. However, upward revisions to CPI in December and November may pose risks to the upside. There were also changes in the weightings of shelter costs and used car prices that may lead to a higher CPI bias.
According to Marc Ostwald, ADM Investor Services chief global economist, the markets have overhyped their enthusiasm for the Fed and other central bank rate pivots, and this week’s CPI and retail sales data may suggest that inflation has increased month-on-month, and U.S. consumer spending is proving more resilient.
Industrial and defence stocks led the gains in Europe, resulting in a 0.3% increase in the STOXX 600 index. The index fell by nearly 1% the previous week. U.S. stock index futures rose between 0.1-0.2%.
The Fed’s future tightening has gained significant attention from markets, with rates expected to peak at around 5.15%, with later and slower cuts. Several Fed officials are expected to speak this week in response to the data. Yields on 10-year Treasuries reached five-week highs of 3.75% after increasing 21 basis points last week, while two-year yields hit 4.51%.
This shift helped the dollar stabilize, particularly against the euro, which dropped by 1.1% last week and hit a five-week low of $1.0656 on Monday. The dollar also received support against the yen due to reports of Japan’s government potentially appointing an academic as the next Bank of Japan governor.