Written by Amanda Cooper
LONDON (Reuters) – Global stocks retreated on Wednesday in cautious trading ahead of U.S. consumer prices data that could change the outlook for monetary policy there, while investors waited to see whether central bank earnings would match lofty expectations.
The bond market got a reprieve from the recent heavy sell-off, as yields on Treasuries fell and those on German 10-year Bunds posted their second biggest loss in more than 40 years.
Wall Street futures were lower in European trading, while the regional index rose 0.3% on the day, led mainly by gains in relatively insensitive UK housebuilders, after data showed an unexpected cooling in the British currency.
Later in the day, investors will get a look at quarterly results from JPMorgan as well Citigroup (NYSE: ), as well as consumer inflation numbers that may inform expectations about what the Federal Reserve may do on interest rates this year.
ADM Investor Services Global Economist Marc Ostwald said the central bank’s “Beige Book” for December, which captures vague evidence of conditions in all 12 Federal Reserve regions, reported economic growth, but expected price pressures to continue.
“Given the strength of recent labor data, and the expected strength in this week’s employment data, the data will likely strengthen the Fed’s determination to halt its rate-cutting cycle,” he said.
Currently, the swaps market shows that traders believe that one rate cut is likely this year, and a second quarter point cut is more likely, as 31.4 basis points are worth it.
This was close to 45 bps a week ago, before the December employment report on Friday revealed strong job growth.
PIVOT POINT
In the CPI report, forecasts focused on a modest 0.2% rise in the headline rate, with risks tilted to the upside. A strong reading of 0.3% or more could see a selloff in global stocks and bonds resume.
“This CPI print is a pivot data point. The ambiguous print is likely to dominate the rally which is likely to get a boost in a tight period of earnings,” JPMorgan analysts said in a note to clients.
“A hawkish print could see 10Y yields run to 5%, increasing volatility across asset classes, and further depressing equities.”
In a flash, US producer price data for December was surprisingly soft, with the underlying rate the lowest for the month. That held back the US dollar and pushed short-term Treasury yields off their highs.
The US 10-year yield fell 1.6 bps to 4.772%, hitting a 14-month high below 4.8% earlier this week.
Benchmark yields in Europe also fell sharply. German 10-year yields were down 2 bps at 2.6%, rising for 10 straight days at the end of Tuesday – the longest stretch since Feb. 1981, according to LSEG data.
Yields on UK government bonds, or gilts, fell to a 10-year low of 7.4 bps at 4.816%, after data showed inflation in Britain rose less than expected in December.
Gilts were at the center of this month’s bond selloff, pushing long-term yields to their highest since the late 1990s on worries about UK government finances.
In currency markets, the pound was largely unchanged on the day at $1.2207, while the Japanese yen was one of the strongest performers. The dollar fell 0.7% to 156.795 yen as markets now see a 70% chance the Bank of Japan will raise interest rates in January after Governor Kazuo Ueda said policymakers would discuss the move next week.
In commodities, oil prices settled just below $80 a barrel after falling 1% on Tuesday.
