Market sell off takes a breather as fundamentals back in focus

Markets are calmer today after another leg lower in the stock market sell off on Tuesday. Futures are pointing to a 0.4% gain in the FTSE 100 at the open, and S&P 500 futures are also higher. The dollar is making a comeback, and EUR/USD has slipped below $1.09 ahead of the European market open.

We are far from a rebound in markets, instead this looks like a pause, to see how the next headline from the White House plays out. There are two drivers of this early price action today: 1, Donald Trump, who played down the chances of a US recession, and 2, the prospect of a 30-day truce between Russia and Ukraine, which is seen as being a step towards a more lasting peace process.

Oil price link to the S&P 500 continues

The oil price is up a touch today; however, US recession fears have knocked global commodity prices in recent days, and Brent crude oil remains below $70 per barrel. The oil price has fallen more than 7% in the past month, in line with the S&P500, which is also lower by 7% in the same time period. A strong link between oil and the US economic outlook is to be expected, going forward, the prospects for the US economy are likely to be a bigger driver of the price of oil than the outcome of the war in Ukraine.

CPI in focus

Markets could be quiet as we lead up to the main event: the US CPI report. The recent focus on President Trump’s seemingly endless capacity to impose tariffs has meant there has been less time to assess the economic data. However, the February CPI report is worth watching. CPI for January reached its highest level since June, driven higher by core service price growth. There was an element of seasonal price hikes that put upward pressure on the CPI report for Jan, the question now is, can inflation moderate to the downside once again? There is some concern that the wildfires in California could put upward pressure on rents last month, which may put upward pressure on the shelter component of CPI . The market is expecting both headline and core inflation to moderate slightly.

The big shift in Fed rate cut expectations

There has been a sea change in Fed rate cut expectations since the last CPI report a month ago. US recession fears have fueled interest rate futures, and the Fed Fund Futures market has priced in a further 50bps of rate cuts this year, compared to 4 weeks ago. There is now a 70% chance of a rate  cut priced in by June and interest rates are expected to end the year at 3.54%. A month ago, the market expected interest rates to end the year at just over 4%. We think it would take a large upside surprise to inflation to scale back Fed rate cut hopes, even though the Fed sounds more cautious on the outlook than the market.

Why consumer confidence data could matter more than CPI

While CPI usually steals the show when it comes to financial market data, the market will also be watching Friday’s consumer confidence reading closely. US Consumer confidence plunged to 2021 levels last month, and since then recession fears have surged, there is now a 25% chance of a US economic recession priced in by some analysts, and trade wars may have also knocked confidence further. Weaker confidence could mean that the probability of a US recession is revised higher, which is why Friday’s report will also be key for market sentiment this week.

Retaliatory tariffs may temporarily knock the euro off course

While the fundamentals are back in focus today, the trade war theme is never far away. The EU has slapped retaliatory tariffs on EUR 26bn of US goods in response to the US  tariffs on steel and aluminum. Although the UK has not followed with retaliatory tariffs, the UK’s Business Secretary said that all options are on the table, and the UK will respond to benefit the national interest. We think that the UK government will be more focused on trying to get a trade deal with the US rather than retaliatory tariffs right now. However, that is not benefitting the pound. Both the euro and the pound are seeing declines on Wednesday, as the dollar claws back some recent losses and as bond yields in Europe fall slightly, which is eroding support for the single currency.

Britain gets building

In the UK, Balfour Beaty is the second house builder to confirm a strong future outlook and a decent upgrade to its order book. It is benefitting from robust infrastructure spending in the UK and the US over the medium term. This could help the FTSE 100’s real estate sector to extend gains from Tuesday.

Overall, tariffs are the dominant theme for markets, however, CPI could temporarily steal the limelight later today.