Inflation remains a risk but…

Thoughts of the Day

From the US bond market’s reaction to the CPI yesterday, it seems that investors may see the unexpectedly higher than expected price rises as a blip in the overall trend of slowing inflation and continue to believe that the US Federal Reserve is likely to have hiked interest rates for the last time this cycle. 

However, the Fed has been telling us repeatedly, they are highly data-dependent and if inflation data continues to disappoint, worries of higher interest rates for longer will resurface.

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Day Ahead

The US Producer Price Index is expected to show that prices rose 1.3% Year-on-Year, up from 0.9% in November.

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What Happened Yesterday

Market Movements as of New York Close 11 Jan 2024
  • Fedspeak:
    Mester (current voter, known hawk): “Fed is not “there” yet on rate cuts, wants more evidence that the economy is progressing as expected. Fed’s current evaluation is for how much longer rates to be kept high, policy kept restrictive. Inflation has to be coming down on a “sustainable basis” before rate cut conversation can happen.”
    (Mester is as hawkish as before.)
  • The Chinese inflation numbers continue to show signs of deflation in China. The Consumer Price Index showed that prices fell -0.3% (vs -0.4% expected) Year-on-Year in December, higher than -0.5% in November. The Producer Price Index showed that prices fell -2.7% YoY (vs -2.6% expected) in December, higher than -3% in November.
  • The US Consumer Price Index (CPI) showed that prices rose 3.4% Year-on-Year (vs +3.2% expected), up from 3.1% in November. The core index, which excludes food and energy, showed that prices rose +3.9% (vs +3.8% expected), down from 4.0% in November. The rise in inflation rate was said to be caused by high healthcare (+4.7%) and shelter (+6.2%) costs.
  • The US Treasury Yield curve inversion narrowed to 0.28% as the US 2-year bond yield fell -0.11% to 4.26% while the 10-year yield slipped -0.06% to  3.98%. Despite stronger than expected US inflation data, bond yields couldn’t stay higher on the day. In reaction to the data, the 2-year bond yield spiked from 4.34% to a high of 4.39% but it quickly lost the gains and spent the rest of the day grinding lower to close at 4.26%. Although the CPI did show that inflation is not heading towards the 2% as fast as expected, the market seems to be taking it as a blip and not something to be worried about for now. 
  • The US stock futures drifted higher through the Asian trading hours with the S&P 500 futures rising to a peak of 4838 (+0.36%). However, it started falling when the London session began with a whipsaw (down to 4802 [-0.38% on the day] and back up to 4827 [+0.14% on the day]) caused by the stronger than expected CPI print.
  • The US stock market opened slightly higher from Wednesday. It then continued to fall lower as the market continued to process the higher than expected inflation print. However, it reversed course halfway through the day. Hence, the S&P 500 fell -0.07% on the day (high: +0.31%, low: -0.92%), the Dow Jones gained +0.04% (high: +0.28%, low: -0.72%) while the Nasdaq rose +0.17% (high: +0.63%, low: -1.04%). 
  • The crypto market surged when NY opened because it was the first day of trading for the newly approved Bitcoin ETFs, with Bitcoin trading as high as 49020 (+4.3%) and Ether trading as high as 2707 (+6.2) within the day. However, profit-taking set in and prices eventually fell and Bitcoin closed slightly lower on the day at -0.63% and Ether rose just +1.31%.
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Headlines & Market Impact

China says the U.S. has ‘weaponized’ chip export controls

Notable Snippet: China’s Ministry of Commerce said Thursday the U.S. is weaponizing export controls and using them as a tool.

”We are highly concerned about the United States’ direct intervention and interference in the issue of high-tech exports by Dutch companies to China,” spokesperson Shu Jueting said at the ministry’s first press conference in 2024, according to a CNBC translation of her Mandarin-language remarks.

“The United States has instrumentalized and weaponized export control issues,” she said, calling for the Dutch side to “respect the spirit of the contract and support businesses in conducting compliant trade.”

She was responding to a question about ASML, the Netherlands-based company that makes lithography machines that are key to manufacturing advanced semiconductors.

Chinese Commerce Minister Wang Wentao also raised concerns about U.S. chip export controls in a call Thursday with U.S. Commerce Secretary Gina Raimondo, according to the ministry.

Wang “focused on expressing serious concern about U.S. restrictions on third-party exports of lithography machines to China, investigations into the supply chain of legacy chips and sanctions that suppress Chinese companies,” the ministry said in a Chinese-language readout translated by CNBC.

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US bitcoin ETFs see $4.6B in volume in first day of trading

Notable Snippet:  U.S.-listed bitcoin exchange-traded funds (ETFs) saw $4.6 billion worth of shares trade hands as of Thursday afternoon, according to LSEG data, as investors jumped into the landmark products approved by the U.S. securities regulator on Wednesday.

The products mark a watershed moment for the cryptocurrency industry that will test whether digital assets – still viewed by many professionals as risky – can gain broader acceptance as an investment.

Eleven spot bitcoin ETFs – including BlackRock’s iShares Bitcoin Trust (IBIT.O), Grayscale Bitcoin Trust (GBTC.P), and ARK 21Shares Bitcoin ETF (ARKB.Z), among others – began trading Thursday morning, kicking off a fierce competition for market share.

Grayscale, BlackRock and Fidelity dominated trading volumes, the LSEG data showed.

“Trading volumes have been relatively strong for new ETF products,” said Todd Rosenbluth, strategist at VettaFi. “But this is a longer race than just a single day’s trading.

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Google cuts hundreds of jobs across engineering, hardware teams

Notable Snippet: Google cut several hundred jobs across the company late Wednesday night as it continues to push for efficiency and focus on its “biggest product priorities,” a spokesperson confirmed to CNBC.

The layoffs will impact employees within Google’s hardware and central engineering teams, as well as workers across Google Assistant, its voice-activated software product. Other parts of the company were also affected, according to Google

Shares of Alphabet, which owns Google, were down more than 1% on Thursday.

The announcement marks the latest cost-cutting effort at Google as it works to rein in the dramatic headcount growth it pursued during the pandemic. Last January, Google slashed its workforce by 12,000 people, or roughly 6% of its full-time employees. The company made other cuts to its recruiting and news divisions later in the year.

Google has also shifted its focus to prioritise developments in areas like artificial intelligence, launching products like the chatbot Bard and the large language model Gemini as it races to keep up with competitors like Microsoft and Amazon.

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Phan Vee Leung
CIO & Founder, TrackRecord