Japanese business activity lifts the yen and global stocks ahead of US inflation data
The yen recovered losses after Japan nominated a new central bank governor, while global shares edged higher on Tuesday, following a rebound on Wall Street ahead of a crucial U.S. inflation report and speeches by members of the Federal Reserve.
The pan-European STOXX 600 was up 0.5% and hovering close to its highest level in a year in response to Asia's positive handover, while London's FTSE 100 continued its upward trend and reached new highs.
The focus on U.S. consumer price index (CPI) data for January, which is anticipated to demonstrate how effective Federal Reserve policy tightening has been in taming inflation, slowed Wall Street futures. The S&P 500 finished the night up 1.1%.
In comparison to December's rise of 6.5 percent, analysts anticipate that headline consumer price inflation will have increased by 6.2 percent in the year to January.
The good news is that the market has been shaken out of its “disinflation view,” according to Deutsche Bank's head of global fundamental credit strategy Jim Reid. He was referring to the fact that markets are pricing in a more hawkish Fed following the excellent job growth numbers that were reported last week in the United States.
As investors priced in the possibility that U.S. rates will remain higher for a longer period of time, two-year Treasury note yields eased 2 basis points to 4.5095 percent on Monday, after reaching three-month highs.
Following the inflation data, investors will keep an eye out for remarks made by Fed members. Tuesday's report could appear more inflationary, according to analysts and strategists, as the methodology is adjusted annually to give real estate more weight.
The effect of inflation on financial markets and interest expectations
After losing 0.2% against its major peers during the previous session, the dollar plunged ahead of the data.
Esther Reichelt, an FX analyst at Commerzbank, stated, "On the one hand, methodological changes are causing uncertainty and are making the interpretation more difficult. On the other hand, it is already emerging that due to adjusted seasonal factors, current inflation momentum appears to have fallen less than had been initially expected."
The primary source of uncertainty for the USD outlook appears to be whether or not the recent data continue to conform to the Fed's expectation of a "bumpy" ride of disinflation.
Particularly, the dollar lost 0.2% against the Japanese yen, falling to 132.115 yen from 0.8% the day before.
Unexpected Selection of Academic Kazuo Ueda as Central Bank Governor May End Yield Control Policy
- The unexpected selection of academic Kazuo Ueda as the Japanese government's choice for central bank governor on Tuesday may increase the likelihood that the country will end its unpopular yield control policy.
- Data indicating that the Japanese economy avoided recession in the final three months of 2022 provided additional support for the yen, even though growth was significantly lower than anticipated.
- After the United States shot down what it claimed was a Chinese spy balloon last week, U.S. Secretary of State Antony Blinken considered meeting top Chinese diplomat Wang Yi at the Munich Security Conference this week, indicating a slight easing of tensions between the world's two largest economies.
- Brent crude futures fell 0.7% to $85.99 a barrel on the oil market, while WTI crude fell 1.1% to $79.26 in the United States.
- Gold gained almost 0.4 percent to $1,862.16 an ounce, benefiting from a slight dollar weakness.
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