CPI revision concerns come to the fore

Markets

On Thursday, U.S. stock indexes remained subdued as markets paused at elevated levels, with the S&P 500 hovering just shy of the symbolic 5,000-point milestone. Investors were carefully assessing significant corporate earnings releases, secondary jobs data, and statements from policymakers regarding expectations for interest rate cuts.

While it's not uncommon for markets to pause and consolidate after reaching significant levels, there's speculation that tomorrow's CPI revisions might dampen recent optimism about inflation. This could shift investor sentiment, which has been relatively resilient to the recent subtle backup in U.S. yields over the past week, considering that correlations can fly as quickly as they stick. 

Indeed, even Treasuries faced challenges in gaining traction despite a robust $25 billion sale of long-term bonds, which concluded a week of increased issuance sizes. 

U.S. yields continued to climb despite the successful 30-year auction, which helped alleviate concerns about oversupply, clearly indicating some caution ahead of tomorrow's CPI revisions. Yet stocks levitated near record height, driven once again by an increasingly narrower group of shares, which has analysts forever worried about concentration risk.

The update of CPI seasonal adjustment factors last year was significant, revealing that inflation momentum was more substantial than previously believed at the end of 2022. This caught both the market and the Federal Reserve by surprise. On Friday, the market will be closely watching the 2023 update to see its implications for the timing of the first Fed rate cut this year.

U.S. jobless claims were a non-event on Thursday. I mention them only in the context of the two prior weeks, which saw meaningful increases.

The recent two-week uptick in initial jobless claims might have been another false dawn. Initial claims have consistently disappointed recession claimants, as each minor increase tends to dissipate quickly against the backdrop of the resilient underlying labour market. It only reinforces investors' awareness of the labour market's resilience, providing the Federal Open Market Committee (FOMC) with sufficient leeway to postpone any considerations of rate cuts.

Oil markets

Crude oil leapt higher as Israel took hope for a ceasefire agreement off the table, triggering a wave of buying as geopolitical risk went on the boil again. Prime Minister Benjamin Netanyahu said that he sees no other solution than total victory following a counteroffer from Hamas for a ceasefire. This comes amid a military escalation against Iranian-backed " terrorist" factions by the U.S. and U.K. concerns. 

Forex markets

The yen continued to weaken overnight as traders were caught off guard by Bank of Japan comments. Speculation was rife among market participants that Deputy Governor Uchida could signal that the BoJ is moving closer to raising rates as early as the next meeting in March. However, nothing could have been further from the speculative truth. He suggested that the BoJ would continue to support the JGB market through bond purchases even after Yield Curve Control (YCC) has formally been brought to an end, aiming to avoid a surge in yields.

China markets

The recent macroeconomic news of China on Thursday added to the prevailing pessimism. The Consumer Price Index (CPI) print for January was worse than anticipated, with prices falling by 0.8% year-on-year, surpassing economists' expectations of a 0.5% decline and marking the weakest reading since 2009. Additionally, Producer Prices slipped by 2.5% from a year ago, reflecting ongoing factory gate deflation over the past 16 months.

Consumer sentiment in China remains dismal, with many still reeling from the effects of the Shanghai lockdown. The government's response to the lockdown, now led by Premier Xi's appointed figure, has not alleviated the consumer confidence crisis. The problem extends beyond credit supply issues and is exacerbated by the lingering effects of the property crackdown.

Burdened by excessive leverage, local governments face constraints in implementing meaningful fiscal stimulus measures. There is growing consensus that the central government must take decisive action, potentially including fiscal stimulus akin to helicopter money, to address China's economic challenges. Urgent action is needed to restore confidence and stimulate economic growth.

If policymakers do not act decisively and quickly, they might fritter away one of the most significant economic breakthroughs ever.