Week Ahead: Bond markets and dollar in focus ahead of US CPI

The new year has continued in the same mode as previous weeks and months. That means more dollar strength, with six straight week of gains, and bulls fuelled further by a sizzling NFP report. That comes on top of the incoming new President and his potentially inflationary cocktail of policies. Bond markets are grabbing the attention currently, with yields marching higher. The proxy for global borrowing costs, the 10-year US Treasury yield, has made fresh cycle highs above last year’s top at 4.73% – are we inevitably heading towards 5%?

In the near-term, much may depend on this week’s US inflation data. An upside surprise in these figures could be challenging for bonds and really light the touch paper for yields to spike higher. Of course, that should take the dollar with it and stocks in turn would suffer as rate cut bets get increasingly priced out for the whole of 2025. Last week’s US jobs report had already ramped up the chances of an extended pause by the Fed, with money markets not seeing another reduction until September.

The fourth quarter earnings season begins this Wednesday with the usual heavyweight banks like JP Morgan, Wells Fargo and Citigroup kicking off quarterly and full year results. Equity markets closed near their lows last week which is not a positive sign. We also noted price action around market leader, Nvidia, which unveiled what appeared to be very upbeat news about new chips. The stock traded up briefly before selling off sharply. The $150 zone looks like strong resistance while the good news / bad price behaviour is typical of what happens at the highs in overstretched sectors. With market breadth once more highly concentrated, this level is worth keeping an eye on.

The UK has recently been in the spotlight as its bond markets have caved in to fiscal and inflationary risks. This has put the government and its chancellor in a tough spot with a decision on whether to raise taxes or cut spending likely needed soon. Sterling has been hit with GBP/USD falling to a one-year low below 1.23. Wednesday’s inflation data is expected to remain sticky. Along with flatlining growth and the worsening fiscal outlook, it is a toxic mix for sterling, which should be benefitting from rising yields.  

In Brief: major data releases of the week

Wednesday, 15 January 2025

– UK CPI: Consensus sees headline inflation ticking up one-tenth to 2.7% due to base effects and the core down one-tenth to 3.5%. November services inflation printed at 5% which remains the key figure for the MPC. Cable is suffering on bond market turmoil. There is a major long-term Fib level (38.2%) of the 2022 low and September 2024 high at 1.2259. Below here is 1.2037 and 1.20.

– US CPI: Expectations are for the headline and core to stick at 0.3% m/m. That would be the fifth straight 0.3% core print. The annual rate is likely to remain above 3%, as it has done for the past six months. Incoming President Trump’s policy mix is expected to be inflationary. Fresh two-year highs are coming thick and fast in the Dollar Index. 110 is an obvious round number target for bulls.

Thursday, 16 January 2025

– Australia Jobs: The December reading is forecast to show 10k jobs added and a jobless rate rising one-tenth to 4%. After the softer than expected annual trimmed mean CPI figure, markets expect the RBA to start cutting rates in February. AUD/USD has fallen through the long-term low from October 2022 at 0.6169. Rallying copper prices are diverging from the tumbling aussie and this differential is not typical so worth watching.

– UK GDP: November growth is forecast to print at 0.2%. This comes after -0.1% in October. An inline print would mean q/q growth likely exceeds the BoE’s prediction of flat growth.

Friday, 17 January 2025

– China Data: Q4 GDP is expected at 1.7% with the annual rate at 5.1%. Retail sales are forecast at 3.5%, up from 3%. Industrial production is predicted to remain at 5.4%. Trump tariff hikes are seen weighing on growth. There is a lot of focus on USDCNH and the 7.3750 level, which was twice touched in 2022 and 2023. Last week saw the PBoC halt purchases of government bonds, a move which was expected to support the currency.

– UK Retail Sales: The December reading is forecast at 0.3% m/m. Seasonal adjustments around the festive period make this number volatile. Weak consumer confidence has likely continued after the tax-rising Budget.

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.