US and European futures are trading lower, although off the lows of the day. Traders are mostly booking profits from their trades as the risk on rally has scored decent gains so far this year while fundamentals haven’t improved significantly.
Today, the focus is likely to remain on monetary policy as a number of central bankers will be speaking today. For instance, Christine Lagarde, the ECB President will be speaking at 10:30 AM and her views about the ongoing inflation situation in Europe would be of high importance for traders and investors. Later in the day, Fed member Brainard will speak as well.
In terms of the economic docket, the US Unemployment Claims data comes out at 01:30 PM GMT and the forecast is for 214K while the previous reading was at 205K.
US Stock Market
On Wednesday, investors took profits on some of the big gains made in January, while dismal data on December retail sales stoked fears about the possibility of a recession. These two factors combined to cause the Dow Jones Industrial Average to fall by more than 600 points. The decline was driven by the price of bank stocks.
At 33,296.96, the Dow had a loss of 613.89 points or 1.81%. After a loss of 1.56%, the S&P 500 reached its lowest level since December 15 when it closed at 3,928.86. The Nasdaq Composite ended the day with a loss of 1.24%, which brought its winning run to a stop after seven consecutive days.
Since the beginning of the year, investors have been enjoying significant upward momentum in stock prices. Despite this, many investors had already begun to question the market’s strength before Wednesday’s drop. The year 2023 has gotten off to a good start for risky assets, as investors have been buoyed by indications that inflation is beginning to decline and China has quickly resumed normal business operations.
The S&P is still up by 2.33% for the month, while the Nasdaq is still up by 4.69%. Meanwhile, the Dow is still up by 0.45% for the month. It is still too soon to say for certain that the danger of inflation has been eliminated completely. In spite of the fact that headline inflation figures for December continued to suggest a slowdown in both the United States and the Eurozone, core inflation has nevertheless stayed far over central bank objectives.
The most recent results for retail sales were analysed by investors. These numbers revealed a decline of 1.1% in December, which was somewhat higher than the 1% reduction that was anticipated. According to the retail sales data, customers are showing signs of decreasing their spending, as department shops have reported a 6.6% reduction in sales, and online sales have dropped 1.1%. The sharp decline in sales indicates that consumption growth is poised to weaken sharply in the first quarter.
The most recent reading on the producer price index was another factor that drove the risk-off rally yesterday. This index monitors the expenses that firms incur to acquire their raw materials. The PPI saw a decrease of 0.5% for the month of December. The majority of the economists polled by Dow Jones anticipated a decrease of 0.1%.
Fed Pouring Cold Water
Even if recent readings on inflation have been lower, the President of the Federal Reserve Bank of Cleveland, Loretta Mester, said on Wednesday that interest rates need to continue to go upward.
The Fed policymaker poured cold water on expectations that the Fed may ease interest rates this year which is influencing the price action today. She indicated that it is probable that the central bank would need to raise its benchmark interest rate above 5% in order to keep inflation moving persistently down toward the 2% objective that the central bank has set. Her comments made traders think that they might be factoring in the Fed’s next move incorrectly. She made the observation that the economy and the markets had little trouble adjusting to the rate increase of a half point in December.
She said, we need to keep moving, and we’ll debate how much to accomplish at any one specific meeting. The meetings will take place on January 31 and February 1. Some believe that the Fed needs to get the unemployment rate over 5%, and then keep it there for a while, until inflation expectations are very solidly anchored around 2%.
Gold prices have reversed their direction today after the two-day sell-off. There is no doubt that traders are a little more nervous about the Fed’s policy as mixed messages continue to come in. For instance, retail sales which came out yesterday made traders think that the Fed is unlikely to take a more aggressive approach with their monetary policy. However, if you listen to the comments from the Fed members such as Cleveland’s Loretta Mester, it makes you think that it is time to rekindle the strategy.
In terms of the price levels, the most important price level in terms of support is at 1,880 while the resistance is at 1,950.