Preparing for an inflation uptick

US markets

US stocks paused on Tuesday, with investors treading cautiously on the eve of a critical consumer inflation report that could dictate the Federal Reserve's next move on interest rates. After a tumultuous year navigating relentless macroeconomic dynamics and a barrage of geopolitical shocks, traders are looking to wind down. Yet, the journey isn't over just yet. They're gearing up for the U.S. inflation data release later today and the final central bank meetings of the year, starting with the European Central Bank on Thursday.

Inflation expectations are crucial in shaping economic trends. The public's outlook on future price increases directly influences their spending habits and, in turn, broader inflationary pressures. A recent survey by the New York Fed shows a slight moderation in consumer inflation expectations, though they remain above the Fed's target of 2%. For November, economists predict the CPI will mirror October’s data, with a projected rise of 0.27% in core prices, maintaining the year-on-year rate at a sticky 3.3%. The headline CPI is also expected to rise slightly, from 2.6% to 2.7%. Yet, these figures will unlikely sway the Federal Reserve from implementing a rate cut in their upcoming meeting.

While a significant spike in inflation could theoretically deter the Fed from lowering rates, the prevailing market sentiment is solidly pro-cut, essentially dismissing any potential pause. Yet, a hotter-than-expected core CPI could disrupt forward consensus, especially considering the unquantified yet expected future inflation impacts of President Trump's tax cuts and trade policies.

We're riding a towering wave of U.S. economic exceptionalism, a surge catapulting "TINA" (There Is No Alternative) capital into the stratosphere of U.S. equities, especially as Silicon Valley's tech titans lead the charge in the AI revolution.

This robust economic vigour suggests the Federal Reserve may not slash rates as dramatically or rapidly as its global counterparts, a scenario that’s solidly propping up the dollar. Factor in the strategic play of tariffs, and it’s clear why the "long dollar" strategy is still one of the hottest trades in town.

Asia markets

As Wednesday dawns, Asian investors grapple with a slippery 'risk-off' baton, carefully dissecting the possible impacts of China's recent policy announcements. Amid this, most stock markets faltered while the dollar and bond yields ascended, setting the stage for a bumpy day ahead. This risk-off vibe mirrors the market's cautious stance in the face of evolving economic stories and geopolitical strains.

As U.S. inflation figures loom, potentially influencing the Fed's decision on rate cuts, Asian investors are likely to remain cautious. The recent consecutive days of stock declines and rising bond yields contribute to a wary market atmosphere. This week's substantial U.S. Treasury issuances, totalling $125 billion in notes and $85 billion in bills, are also key factors prompting rates traders to adopt a more guarded approach. This significant financial market activity heightens rate traders’ anxiety, creating an anxious environment beyond the usual morning caffeine jitters.

The spotlight intensifies on Beijing after its seismic monetary and fiscal strategy shift earlier this week, capturing global attention. Will China's bold declarations spark concrete actions or dissolve into mere rhetoric? The urgency for decisive intervention is magnified by Tuesday's startling trade data, revealing a nearly 4% year-on-year nosedive in imports, a figure that shattered the most pessimistic forecasts. This alarming contraction underscores the brittle backbone of China's domestic demand, heightening the stakes for Beijing to deliver on its promises.

The crux of the issue in China is starkly apparent: the Communist Party's legitimacy hinges on its promise to consistently improve the quality of life for its citizens. This is the foundation of an unspoken social contract that President Xi Jinping is perilously close to violating. Many in China did not endorse Xi's ambitious goal to eclipse the United States as the global superpower, especially as this pursuit begins to undercut the nation's economic prosperity. Coupled with the repercussions of a mismanaged property market crackdown and the faltering results of Xi's "common prosperity" initiative, the Chinese populace is facing a double whamish, struggling to align with leadership actions that seem increasingly detrimental to their well-being.

Forex markets

Market sentiment is poised with anticipation as the December FOMC meeting approaches, with dollar bulls betting on a narrative of US economic fortitude. There's widespread speculation that the Fed might showcase a conservative stance on rate adjustments, possibly signalling a pause in cuts as early as Q1 2025.

The Fed is in its "blackout" period, heightening focus on today's critical U.S. CPI data, which could sway their forthcoming decision on December 18th.

Shortly after, the European Central Bank will take the spotlight, with the financial world keenly awaiting President Lagarde's press conference. Her comments are highly anticipated to hint at further easing, which could soften the euro's outlook.

On another front, yen traders are navigating a storm of conjecture regarding a potential Bank of Japan rate hike, set against expectations that the Fed might hold rates steady in early 2025 due to the robust US economy. This scenario bolsters the "There Is No Alternative" (TINA) effect, further entrenching the dollar as a haven for global investors amidst a turbulent economic climate.