A look at the day ahead in U.S. and global markets from Mike Dolan
Thanks largely to a stabilisation of bond markets and an ebbing of the super-strong dollar, global stocks caught a rare new year bid on Tuesday with critical inflation and corporate earnings updates now in view.
A slightly bizarre narrative developed behind Monday’s bounce in stocks, with some citing a Bloomberg report claiming President-elect Donald Trump’s team is studying gradual tariff hikes – using emergency legislation to boost import duties 2%-5% per month until they wreak concessions from trade partners.
While it may have sown some relief that larger one-off tariff rises are not coming as soon as next week, the prospect of months – or even years – of drip-fed tariff hikes, and serial threats of such, doesn’t sound like a recipe for smooth market sailing or easier inflation concerns ahead.
Nevertheless, this year’s relentless selloff in Treasuries has paused at least over the past 24 hours and a slightly more positive posture there filtered through Wall Street stocks and out across the world overnight.
With December producer and consumer price reports due out today and Wednesday, respectively, 10-year benchmark Treasury yields have dialled back from 14-month highs above 4.8% hit on Monday and 30-year ‘long bond’ yields are balking at 5% for now.
Helping the mood on Monday was the release of the New York Fed’s December consumer survey, which painted a more mixed picture of public inflation expectations than a sparkier University of Michigan readout last Friday. The latter had aggravated bonds’ post-payrolls swoon late last week.
The NY Fed poll showed households’ expected path of inflation a year from now remained steady at 3%. While the 3-year view rose to 3% from 2.6% in November, the 5-year view ebbed to 2.7% from 2.9%.
This saw Fed futures find their feet and the market is back pricing one interest rate cut this year – by October – compared to a scenario early yesterday morning that showed none fully priced for the whole of 2025. A stalling of crude oil prices, which hit four-month highs on Monday on the latest U.S. sanctions on Russia, also calmed the bond market horses a bit.
However, annual headline and ‘core’ U.S. producer price inflation readings due later on Tuesday are expected to see a significant pickup up in 3.4% and 3.8% respectively.
And more importantly, tomorrow’s consumer price report is expected to show the ‘core’ annual inflation rate stuck as high as 3.3% last month.
Market inflation expectations embedded in Treasury inflation-protected securities are now just a whisker from 2.5% for the first time since October 2023. The NY Fed’s estimate of the so-called ‘term premium’ demanded by investors to hold 10-year Treasuries, meantime, hit almost 65 basis points on Monday for the first time since September 2014.
