A milder core CPI boosts investor sentiments

Markets

Wall Street soared on Wednesday, riding a wave of euphoria as bullish bank earnings smashed expectations. A critical inflation report delivered a pleasant surprise, hinting at a slowing pace of core price hikes. The S&P 500 rocketed over 1.8%, while the Dow Jones Industrial Average surged more than 1.6%, adding a robust 700 points. The tech-centric Nasdaq Composite outperformed, catapulting up by 2.5%.

Investor spirits were lifted as 10-year Treasury yields plunged 13 basis points to 4.65%, temporarily loosening the recent vice-like grip on equity markets. This breath of fresh air came just in time, ahead of the US inauguration, as back-to-back inflation reports—PPI and CPI—registered cooler than anticipated, feeding into this newfound optimism.

Wall Street's mood was also lifted as major banks reported surging profits, sparking a wave of optimism across the financial sector. JPMorgan Chase led the pack, smashing through optimistic analyst forecasts to post yet another year of record earnings. Goldman Sachs followed suit, exceeding expectations with robust profit figures, highlighting its financial acumen.

The positive news continued, with BlackRock, Wells Fargo, and Bank of New York Mellon all announcing impressive quarters. These stellar results underscored the vitality and resilience of the financial sector. They buoyed investor confidence, significantly boosting Wall Street's mood and adding momentum to the market amid ongoing economic uncertainties.

However, the spotlight shone on the Consumer Price Index (CPI), which increased by a lower-than-expected 0.2% on a core basis month over month, retreating from November's 0.3% rise. The annual increase settled at 3.2%. This deceleration, the first since July, suggested a gentle easing in the persistent inflationary pressures that have dogged the market.

While Wednesday's data painted a rosier picture, stoking market rallies, I remain wary. Despite the encouraging signs, inflation's undercurrents are still robust, and with the fiscal and geopolitical landscape bristling with uncertainty, we're not out of the woods yet. The markets might be celebrating now, but the road ahead could still hold some bumps, especially if fiscal and trade policies throw curveballs. This dance with inflation is far from over, and today's relief could be tomorrow's challenge.

The Federal Reserve must still combat the inflation dragon and remain on a more measured rate-cutting path. The central bank is set to hold steady this month and may delay further rate cuts until it can assess the full impact of tariffs, which are expected to start rolling out next week.

Asia markets

Finally, investors in Asia took a breather after Wednesday's U.S. and UK inflation figures, offering a reprieve from the stranglehold of soaring global bond yields. While it's premature to declare a significant market shift, the battered realms of fixed income and emerging markets were ripe for a rally on any snippet of good news.

The spark? Stellar U.S. bank earnings and, subtly on the sidelines, a ceasefire between Israel and Hamas, both buoying market spirits. Yet, the primary market movers remain the inflation update from the U.S., which triggered a swift drop in bond yields and a surge in stocks.

With this information, Thursday should be a brighter day for trading across Asia. Enjoy it while it lasts, as we all know how quickly the tides can turn in these unpredictable financial seas.

Forex markets

The US CPI data came in somewhat better than anticipated, registering a modest relief in inflation pressures, with a core print slightly below expectations. This has given the Treasuries market a brief moment to test lower yields. However, I'm skeptical that this bond relief rally will extend much further. A few small beats on inflation expectations aren't enough to turn the tide, especially with the new administration poised to fuel the US economy to even hotter levels.

In the FX markets, traders seized the momentary dollar dip to bolster their positions, anticipating more volatility as US inauguration day approached. The notable outlier was the yen. The Bank of Japan is sending more precise signals about a potential rate hike in January, significantly shifting market expectations. This is the kind of decisive guidance we've been looking for. Yet, despite a significant drop in 10-year US yields, the USD/JPY remains stubbornly above 156, signalling that investors are still treading cautiously in these unpredictable times.

Oil markets

Oil prices surged on reports that sixty-five Russian oil tankers have halted operations worldwide in response to new U.S.-U.K. sanctions targeting Russia’s oil industry and shadow fleet. A ship-tracking data firm reported the “ Anchors Down.” These sanctions are part of a broader effort to curtail Russia's ability to circumvent previous restrictions on its oil exports.

Five of these tankers were reported to be anchored near strategic locations in Asia—off the coasts of China and Singapore. Additional vessels were idling in the Baltic Sea and near Russia’s Far East. This dramatic action impacts the notorious shadow fleet, which consists of aging tankers frequently used to evade sanctions and is known for transporting Iranian oil under sanctions.

The fresh sanctions have implicated over 180 vessels, intensifying the crackdown on Russia’s export capabilities. This move particularly impacts Asian markets, where much of the targeted oil is destined. By abruptly halting these shipments, the sanctions have significantly shifted the short-term supply and demand dynamics, setting the stage for potentially higher oil prices as Asian suppliers scramble to address the sudden shortfall.