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It’s another week marked by US holidays, with Wall Street observing Martin Luther King Day today, so markets are getting off to a rather sluggish start in Asia. That said, there is a lot of geopolitical and macro noise in the market, so it’s probably not the time to get over complacent, especially with consumer sentiment apt to get held hostage to the gnarly geopolitical scrim as policymakers, companies and investors struggle to operate in today’s highly politically charged environment.
Given the market has moved all in on March’s rate cuts after evident pipeline disinflation in the PPI data, traders will be intently focused on Federal Reserve discussions and significant data releases from the world’s largest economy this week. However, no major narrative shake-up is expected. Of course, a more robust retail sales number could slightly push back the odds of a March rate cut by the Fed, but unless the print is of the home run variety and one that knocks it right out of the park, it is unlikely to be a decisive game-changer.
Geopolitically, tension rises following more US airstrikes on Yemen over the weekend, and domestically, President Biden faces challenges in foreign policy on two fronts: the Middle East and Taiwan. Both of these issues could weigh negatively on Consumer Sentiment. Given that probability preliminary read on the University of Michigan, sentiment for January will be front and center in traders’ minds. Recall consumer sentiment and confidence were relatively buoyant last month thanks partly to meaningfully higher asset prices and declining inflation expectations.
Xi Jinping might be grimacing after Taiwan elected Lai Ching-te for president, marking a third term for the Democratic Progressive Party. Voter turnout was 70%. Lai, who served as vice president since 2020, succeeds Tsai Ing-wen, who stepped aside due to term limits. Lai’s victory is seen as a rebuke to Beijing, as he has been labelled a “troublemaker” by pro-China factions and a supporter of Taiwan’s independence from The Chinese Communist Party.
Lai emphasizes the preservation of democracy and is expected to follow Tsai’s approach in deepening Taiwan’s ties with Washington without actively seeking confrontation with Beijing. China may view the election results as a step toward conflict, as Xi Jinping maintains that reunification with Taiwan is a historical inevitability.
Federal Reserve speakers include Barr, Bostic, Bowman, Williams, and notably, Waller—twice. Waller’s previous remarks hinted at a dovish pivot, emphasizing the importance of rate cuts as inflation falls. But his is nothing earth-shattering and simply part of the FED policy that says if you cut as inflation falls to avoid the real policy rate rising mechanically. Hence, the market has at least and probably more than 75 pb Fed cuts to work with, given the calmer PCE deflator, the key Fed. inflation gauge.
With market hawks moving into “can’t beat them join the mode,” an odds-on 80% March rate cut probability has been packed into the short-term swaps market.
Globally, attention will be on China’s activity data, especially in light of CPI figures showing Chinese consumer prices in deflation for a third consecutive month in December. The People’s Bank of China PBoC may consider a key policy rate cut, and China will also release GDP figures.
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