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Eyes on U.S. CPI
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ROSES ARE RED, INFLATION IS TOO... (1216 GMT)
The Fed's watching services... to see when it's through. If you're looking for a thorough review ahead of today's Valentine's CPI print, then you could do worse than read the above link. If you're looking for what it might mean for markets, read on.
The Fed's data-dependent approach has meant the markets have had a love affair with CPI data over the last year, with equities, bonds and currencies all seeing outsized price swings on CPI day.
"Only two of the past 12 monthly reports have been in-line with forecasts," eToro global markets strategist Ben Laidler notes. "This saw an average 1.9% S&P 500 and 1.3% STOXX 600 'inflation day' price swing."
Jefferies interest rate strategist Mohit Kumar highlights that Tuesday's print has "added complexity" given large seasonal adjustments and weights, with market bias seemingly for an "upward surprise".
"Hence, an inline print would be seen as a relief for fixed income and risky assets," Kumar says.
"Given the difficulty in predicting inflation in recent months, we would focus on the expected market reaction rather than on predicting the number."
And finally, from Barclays on the sheer magnitude of today's data.
"This week's US CPI is one of the most pivotal prints in recent memory," analysts at the bank said in a note released on Sunday.
"In the absence of accelerating inflation, accelerating growth is positive for risky assets and negative for the USD," Barclays said.
"A strong number, on the other hand, would obviously favor Fed hawks for a while."
Economists polled by Reuters expect headline annual inflation to slow to 6.2%, with the core reading slowing to 5.5% from 5.7%.
BRITAIN'S TRAVEL STOCKS TAKE OFF (1127 GMT)
Tuesday has been another strong day for London-listed travel stocks. A double-upgrade for easyJet and an upbeat trading update from TUI has pushed the sector back towards an 11-month high hit earlier this month.
TUI, dual-listed in London and Frankfurt, said it was seeing a positive travel recovery trend for the summer season, despite market worries that inflationary pressures might dampen demand for travel.
"There doesn't seem to be any doubt about the lasting appeal of an escape away on holiday," says AJ Bell investment director Russ Mould, "something which has arguably been strengthened by the pandemic."
For easyJet, Deutsche Bank equity analyst Jaime Rowbotham has flipped positive on the name.
"The UK economic outlook has 'improved dramatically' according to our colleague Sanjay Raja," Rowbotham writes.
"We see this as positive for easyJet, the airline we cover which we think has greatest exposure to the UK."
Rowbotham notes that around 40% of easyJet's pre-COVID profit was from the UK and so upgrades the shares from a 'Sell' rating to 'Buy', propelling shares 4% higher on the day.
The helped push the FTSE 350 travel and leisure index up 0.9%, heading back towards its highest level since February last year, after around a 35% jump from its October low.
O CONSUMER! MY CONSUMER! PERSONAL SAVINGS NOT DOWN YET (1113 GMT)
How much of the 'excess' personal savings of U.S. consumers remain, following high inflation, interest rate hikes and rising lay-offs?
Citigroup says the personal savings, the trajectory of which shapes the outlook for consumption and economic growth, may be larger than the current estimate of the U.S. central bank staff - which is in the range of $1.2 trillion.
U.S. consumers were flush with savings during the pandemic and those are currently being drawn down due to higher borrowing costs and inflation.
The U.S. Federal Reserve's estimate of excess savings is "likely a floor rather than a ceiling," says the brokerage in a note dated February 13.
A prominent paper from the Fed's staff estimates an average expected saving rate of around 8.7% in this cycle (since 2020) and a current saving rate near 9%.
Even modest adjustments to the Fed paper assumptions about saving behavior can raise the Fed's estimate by several hundred billion dollars, says Citi.
The brokerage adds consumers' balance sheets are more healthy and, "at a minimum their current state should help buffer the economy during a downturn."
STOXX 600 UP ON TELECOMS BOOST, BUT TECH FALTERS (0910 GMT)
European stocks are faring better than futures indicated before the open, with the STOXX 600 last up 0.4%.
Astrazeneca, Nestle and TotalEnergies are providing the biggest boost to the index on an index net points weighted basis.
Telecoms are up 1.6%, pushed higher as Vodafone shares tick up 3.9% after news that Liberty Global bought a 5% stake in the British telecoms operator.
Travel names are also doing well after positive signals from holiday group TUI about the outlook for summer.
Meanwhile interest-rate sensitive tech names is the only sector slipping slightly into negative territory this morning, down 0.04%.
DON'T BREAK MY HEART (0755 GMT)
Today's inflation numbers from the world's biggest economy on Valentine's Day will be one of the most important economic data watched by markets.
While blockbuster January jobs data has forced some market participants to grudgingly accept that the peak is not yet near for interest rates, investors are still hopeful that the Federal Reserve could begin cutting rates later this year.
As Toronto-based independent proprietary trader Kevin Muir said: "I don't know if it will be this release or the next one, but I suspect the market has accepted the return to inflation normalcy a little too eagerly."
"There appears to be little fear about a lingering inflation problem. Sure, there are a few pundits warning about inflation, but the market is clearly screaming at the top of its lungs that inflation worries are misplaced."
The market expects rate increases to ease despite Fed Chair Jerome Powell acknowledging last week that rates may need to move higher than expected if that sort of economic strength threatens the Fed's progress in lowering inflation.
Economists polled by Reuters expect Tuesday's CPI reading to show headline prices and the core CPI gaining 0.5% and 0.4% month-over-month for January, respectively. However, some recalibrated their expectations on Monday for a slightly lower CPI.
Asian shares edged up on Tuesday, while the yen recouped losses as Japan nominated a new central bank governor.
Adding to the positive momentum, sources said that U.S. Secretary of State Antony Blinken is considering meeting top Chinese diplomat Wang Yi at the Munich Security Conference starting this week.
This would mark their first face-to-face talks after the United States shot down what it said was a Chinese spy balloon and other flying objects.
Meanwhile, the deep freeze over UK assets is thawing.
After last year's upheaval, Britain's stocks and bonds are drawing strong investor interest, with the FTSE 100 stock index flirting with record highs as the bourse benefits from global trends such as the reopening of China's economy and strong energy prices.
Ten-year government bond yields have fallen 27 basis points so far in 2023 to 3.4% in one of the biggest declines in government financing rates among the Group of Seven most advanced economies.
A Reuters poll published on Tuesday showed that the Bank of England will make its final increase to borrowing costs in the current cycle next month to combat double-digit inflation, while the economy is almost certainly entering a recession.
In Italy, Prime Minister Giorgia Meloni and her coalition allies scored emphatic election wins in the two wealthiest regions of the country, strengthening the right's grip on power.
Meanwhile, Qatari investors are preparing to make a bid to buy Premier League club Manchester United in the coming days, Bloomberg reported.
Key developments that could influence markets on Tuesday:
European economic data: Euro zone flash Q4 GDP, UK Dec jobs, Jan unemployment count
U.S. CPI data due: Jan CPI - core CPI forecast at +0.4% from +0.3% in Dec, +5.5% year-on-year from +5.7%
EUROPEAN FUTURES EDGE UP AHEAD OF U.S. CPI (0742 GMT)
Has the market been too optimistic about the rate of inflation as of late?
We should have at least a semblance of an answer later today, when U.S. CPI figures land. Perhaps understandably, European futures are making tentative moves higher this morning.
STOXX futures, DAX futures and FTSE futures are all up about 0.1%while U.S. futures are flat.
A majority of economists polled by Reuters think the U.S. Federal Reserve will raise interest rates at least twice more in coming months, with the risk they go higher still, and they see no cut by year-end.
European earnings continue to trickle through, as does the impact of inflation on companies' performance. Norwegian aluminium producer Norsk Hydro said inflationary pressures in 2023 are likely to subside, though the outlook is "unpredictable", as it posted a bigger-than-expected fall in fourth-quarter core profit.
Meanwhile, holiday group TUI, said on Tuesday it was seeing a positive travel recovery trend for the upcoming summer season.
