US CPI release set to dominate

We are seeing a cautious tone in Europe this morning, following on from the jitters seen throughout US and Asia. The concerns that have revolved around AI disruption in the software segment have spread into any other part of the US market that could lose business to new low-cost technological advances. Yesterday saw the financial services stocks particularly feel the pinch, although ultimately the declines spread throughout the vast majority of the S&P 500. Notably, despite developments around a potential deal that sees closer economic ties between the US and Russia, the UK pledge to send £540m worth of weapons to Ukraine as part of a Nato funding scheme has helped lift defence names BAE Systems, Rolls-Royce, Rheinmetall and more. With European leaders gathering for the Munich security conference today, Zelensky has noted that he has little interest in presenting a “bad deal” for a referendum to end the war. With Marco Rubio providing the US view on Saturday, there is a hope that he strikes a friendlier tone than JD Vance last year. Nonetheless, with the US seemingly focused more on the economic benefits of making a deal with Russia than appeasing their allies in Europe, undoubtedly the European nations will need to spend more to build up their own capabilities.

Yesterday’s announcement that Russia has proposed a set of conditions for a economic deal that could bring them much closer to the US shocked many in the markets. However, the most notable part related to the potential move back towards the use of the US dollar, pushing back against the de-dollarisation narrative built by their fellow BRICS nations. This understandably sparked a rise in the US dollar, with precious metals hit hard as a result. Notably, this is yet another move to undermine the multiple narratives that underpin the rise for precious metals, with the potential strengthening of the US dollar helping to drive gold lower. We also saw impressive demand at a US treasury auction as they managed to sell $25bn in 30-year bonds. Crucially, as investors struggle to understand what companies are going to be hit by the AI wave next, we are seeing many flock towards fixed income as a way to gain yield without the risk associated with the stockmarket. 

Today brings the latest US CPI inflation figures, coming hot off the heels of Wednesday’s mixed US jobs report. The headline read of stronger payrolls and weaker unemployment essentially took the chance of a Powell rate cut off the table for many, with markets now pricing a 75% chance that rates stay steady for the next two-meetings. However, questions around the annual revision, the role of benchmark adjustments to boost the 130k payrolls figure, and the lack of job creation outside of healthcare and education means that today’s CPI figure will still play a key role in sentiment. A hot figure would certainly double down on the notion of a more cautious Fed given the fact that Warsh has repeatedly warned the Fed not to cut rates against a backdrop of rising price pressures. However, a weaker inflation figure could see the dollar turn lower once again as we price a potential for additional easing in the year ahead.