Marketmind: Inflation tests market thesis, bitcoin gets ETF nod

[January 11, 2024]  A look at the day ahead in U.S. and global markets from Mike Dolan

If the aggressive interest rate easing markets have priced for 2024 is to ring true - against what Federal Reserve officials are currently signaling - then days like today will have to come good.

Despite excitement around 34-year highs for outperforming Japanese stocks and U.S. regulators finally approving exchange traded funds to track bitcoin, the release of the critical U.S. consumer price inflation report for last month dominates the rest of Thursday.

In advance of the report, Wall St has recovered its zest after a ropey start to the new year and is back in the black for the year to date. Bonds too have found their feet, with the 10-year Treasury yield falling below 4% after a relatively smooth auction of new notes late Wednesday.

If consensus prevails, the CPI report should keep all happy and 'core' inflation is expected to have fallen below 4% for the first time since May 2021 - clocking 3.8% for December - even if annual base effects lift the headline a tick to 3.2%.

And Fed futures traders remain confident in penciling in more than 140 basis points of policy easing for the year - with more than two-quarter point cuts seen by mid-year. The dollar was on the back foot again.

Too much, too soon? New York Fed chief John Williams certainly seemed to think so, saying late Wednesday that "our work is not done".

Without specifying exactly what a 'restrictive' policy stance amounts to - something of a slippery concept for many in markets - Williams said the Fed needed to hang tough "for some time."

U.S. stock futures and Treasuries were buoyed early Thursday going into the data release.

While everyone was waiting, the buzz was in Japan and bitcoin.

Having climbed 20% in six weeks in anticipation of the Securities and Exchange Commission's green light for bitcoin ETFs - gyrating wildly around the false announcement hack late Tuesday - the reaction of the biggest crypto token to the real statement overnight was rather muted.

Bitcoin was up 0.6% on the day to about $46,250 - well off Tuesday's 22-month high of $47,915.

The SEC said on Wednesday it approved 11 ETF applications, including from BlackRock, Ark Investments/21Shares, Fidelity, Invesco and VanEck. Three, including BlackRock's, were trading early Thursday, with more expected to begin later in the day.

Industry focus now turns to the second largest cryptocurrency ether, which underpins the ethereum blockchain network. Ether was up more than 4% on Thursday. BlackRock filed for a spot ethereum ETF in November 2023.

Back in stock markets, Japan's Nikkei marched on - topping 35,000 points for the first time since 1990.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 9, 2024. REUTERS/Brendan McDermid/File Photo

Buoyed by renewed yen weakness this year, amid hopes that soft inflation and wage data and the recent earthquake in the country would stay the Bank of Japan's hand in tightening policy early, the Nikkei has outperformed the MSCI all-country index by 2% so far in 2024 and by 15% over 12 months.

It's now less than 10% from record highs hit at the height of the Japanese property bubble in 1990.

Elsewhere, markets were braced for the tense weekend elections in Taiwan and the start of the U.S. earnings season with many of the big banks reporting on Friday.

In Europe, bond yields fell back after Wednesday's pop higher on relatively hawkish comments from European Central Bank board member Isabel Schnabel - who said it was too early to talk about rate cuts.

British retailer Marks & Spencer was the biggest loser on the STOXX 600, dropping 4.9% after its uncertain outlook sparked profit-taking.

Job cuts at U.S. Big Tech companies caught the attention.

Alphabet's Google said it was laying off hundreds of employees across multiple teams, with Fitbit co-founders James Park and Eric Friedman also leaving the company, as the tech giant continues to cut costs.

Amazon.com, meantime, said it would lay off several hundred employees in its streaming and studio operations.

Key diary items that may provide direction to U.S. markets later on Thursday:

* U.S. Dec consumer price inflation report, weekly jobless claims, Dec Federal budget

* Richmond Federal Reserve President Thomas Barkin speaks

* U.S. Treasury auctions $21 billion of 30-year bonds, 4-week bills

* U.S. secretary of state Antony Blinken visits Egypt to meet Egyptian President Abdel Fattah al-Sisi

(By Mike Dolan, editing by Emelia Sithole-Matarise; [e-mail])

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