Headline inflation ticked up in December, although core inflation showed signs of cooling, leaving the Federal Reserve on the fence. While the market initially reacted negatively, expectations for rate cuts soon returned, with a 96% chance of easing by May. The biggest concern remains service inflation, driven by wage growth, which the Fed aims to bring down to 2%. The Conference Board predicts a limited recession in the first half of 2024 but expects a rebound later in the year due to planned Fed policy changes. Interest rate cuts are likely to begin in mid-2024, followed by quantitative easing, potentially reigniting inflation in 2025.
EQUITY
Wall Street closed flat on Thursday, caught between hopes of a resilient economy and reinflation fears that could delay the Federal Reserve's rate-cutting plans. Treasury yields dipped, providing a floor for equities after an initial fall. Meanwhile, Tesla's pay raise announcement for its U.S. factory workers and Hertz's EV selloff stoked anxieties about electric vehicle demand coupled with waning profits.
GOLD
Gold prices rose Friday as a weaker dollar and Middle East tensions stoked demand, but gains were capped after strong US inflation data reinforced expectations for steady Fed rates. Safe-haven buying initially surged following coalition strikes in Yemen before the December CPI topped forecasts, prompting hawkish signals from Fed officials and reducing hopes for earlier rate cuts.
OIL
Oil prices surged over 2% Friday as Iran's tanker seizure in the Gulf of Oman and the U.S. airstrikes campaign in Yemen countered Houthi attacks on Red Sea shipping, raising supply disruption fears and continuing tension in the region. Bargain hunting after recent price slumps also fuelled the rally.
CURRENCY
The dollar found limited support, with its early gains evaporating as traders remained fixated on potential rate cuts later this year. In Asia, however, a glimmer of economic hope emerged with China's data hinting at recovery. As markets await key Chinese GDP figures next week, its direction is likely to hinge on the Fed's interpretation of inflation and the global economic trajectory.
