Inflation, rates and bank results on the market menu next week

Jan 5 (Reuters) – An avalanche of data should give markets a clearer idea of ​​how quickly inflation is falling around the world, but tensions in the Red Sea and rising oil prices are likely to reignite fears on price developments.
On the business side, the big Wall Street banks will kick off the quarterly results season next week, while movements in cryptoassets are expected to fuel greater volatility.

Overview of market prospects in the coming days:

1/ THE INFLATION-PROOF CHRISTMAS RALLY

Equity markets posted a significant rally at the end of 2023 in anticipation of an interest rate cut from the US Federal Reserve (Fed) this year. The data on American inflation, which will be published on January 11, should reinforce this hope or risk disappointing.

The gradual slowdown in inflation has increased expectations that the central bank could begin reducing borrowing costs as early as March. Signs that inflation remained low in December would likely support that view, although a larger-than-expected decline could also fuel fears that monetary tightening is starting to weigh on the economy.

On the other hand, a report showing that consumer prices are rising again could revive fears that markets may be underestimating how long it will take for inflationary pressures to subside. Economists polled by Reuters expect consumer prices to reaccelerate by 0.2% in December, after rising 0.1% in November.

2/ TROUBLE WATER

Investors are monitoring the development of the conflict between Israel and Palestinian Hamas to determine whether it will have an impact on crude prices and therefore inflation. But forecasts of an oversupply of crude on the market do not allow clear conclusions to be drawn.

In addition to fears of an escalation of the conflict in the Middle East, attacks by Yemeni Houthi rebels in the Red Sea add a dose of uncertainty to price developments.

With shipping groups forced to avoid the Red Sea, retailers are facing one of the biggest freight upheavals since the COVID-19 pandemic crippled the sector in 2020.

This extends delivery times, creates shortages and increases costs which could in turn fuel inflation, trade analysts say.

The British Retail Consortium believes that rising costs could reverse the trend observed so far in moderating food inflation.

Investors, more focused on relatively moderate oil prices, have so far shown little concern about shipping through the Red Sea. But they would do well to monitor freight costs more closely for signs of a possible resurgence of inflation.

3/ AVALANGE OF DATA ON INFLATION

Central bank officials in Australia, China and Japan will scrutinize this week’s inflation data, a key indicator, to determine how much work remains to be done this year.

The Reserve Bank of Australia (RBA), one of the central banks likely to cut interest rates this year, may find some relief in November inflation figures, due to be released on 10 January, in the event of a slowdown.

The Bank of Japan (BoJ), whose monetary policy runs counter to that of most major central banks, should on the other hand welcome a possible increase in consumer prices next Tuesday. An upward indicator would also reassure supporters of an exit from the bank’s ultra-accommodating policy. This hope caused the yen to jump 5% against the dollar in December.

In China, figures due Friday will provide a clearer indication of whether deflationary pressures continue to intensify in the world’s second-largest economy.

4/ THE FED IN SUPPORT OF THE BANKS The big Wall Street banks like JPMorgan Chase, Bank of America and Citigroup will open the ball rolling on the results of the fourth quarter and the entire fiscal year next Friday.

These banks are expected to have benefited from the Fed’s high interest rates, offsetting a further decline in revenues from M&A transactions.

Retail banking will also be monitored in a context where some consumers, particularly those on low incomes, are starting to fall behind on their repayments.

Commercial real estate is expected to remain a drag on the activity of banks, which have set aside liquidity to cover defaulting loans. As many employees continue to work remotely or in a hybrid manner, office owners who have borrowed money to finance their buildings are likely to face new strains.

5/ HOPES ON CYRPTO ETFs Bitcoin started the new year at the same pace as the end of 2023 with significant gains, as investors continue to bet on an imminent approval of ETF index funds directly backed by bitcoin by the US stock market regulator, the SEC (Securities and Exchange Commission).

The most famous cryptocurrency jumped 156% last year, its best annual performance in three years, exceeding $45,000.

Market participants believe that a favorable decision by the SEC could lead to a new wave of capital into cryptocurrencies.

However, bitcoin still remains volatile. It recently erased part of the gains acquired in 2024 and still remains far from its all-time high of $69,000 reached in November 2021. According to some analysts, doubts remain about the extent of demand for a bitcoin ETF, just like its possible approval by the SEC.

(Writing by Rae Wee in Singapore, Ira Iosebashvili and Lananh Nguyen in New York, and Naomi Rovnick and Tom Wilson in London; graphics by Vineet Sachdev, Pasit Kongkunakornkul, Sumanta Sen, Kripa Jayaram and Riddhima Talwani; compiled by Karin Strohecker and Dhara Ranasinghe ; French version Claude Chendjou, edited by Kate Entringer)