Concerns over tighter money conditions on the back of positive economic and inflation expectations started the ball rolling last week, though the sell-off in the bond market have certainly gathered pace this week.
The Cboe volatility index, VIX, shot briefly past the 50 percent level in the week with the likes of the S&P 500 and Dow Jones indices clocking week-to-date (WTD) declines of over 6% as of Thursday’s close. Crossing into the shortened new week for Asian markets, this theme may very likely linger and overshadow many of the economic releases in guiding the markets. Although, the same may not be said for US inflation numbers which are expected to invite added scrutiny next Wednesday.
Central to the recent pick up in tightening expectations had been the improved view towards price inflation growth. Last Friday saw US 10-year yields rise by about six basis points post the release of better than expected average hourly earnings, creating pressure for upside surprises in the upcoming CPI data this week. The current market consensus for January’s CPI sits at 0.4% month-on-month (MoM), expected to tick up from the 0.2% print previously, certainly one to watch. Given past acceleration in inflation growth at the start of the year, there exists upside risks to inflation and in turn, yields. This inflation update would also be pertinent to the trajectory of real yields which has soared lately. Likewise for the ripple effect towards the US dollar and equity markets, this could be the biggest event risk for markets next week by far.
Accompanying the headline CPI data would be a slew of data including retail sales, industrial production, housing starts and the University of Michigan sentiment, all to watch for signs that could reaffirm the current growth story and boost yields. Of Federal Reserve speakers, Cleveland Fed President Loretta Mester, who is also a voter this year, is expected on the wires next week to continue with the hawkish rhetoric.
Most of the Asian region are expected to be away into the end of the week for the Lunar New Year holidays, though we still do see a number of tier-1 data updates in the region. Q4 GDP figures from the likes of Japan, Singapore and Malaysia will all be due on Wednesday. The notable release will likely be from Japan after seeing the economy persists in growth for seven straight quarters, looking set to bring home its eighth albeit at a moderated pace. The Bank of Thailand and Bank Indonesia also convene for their first 2018 central bank meetings next week, both due to keep policy rates unchanged according to market consensus.
While the overarching theme of market volatility reigns, there is no denying that we are still receiving handsome earnings release reports as the earnings season rolls on. The likes of the S&P 500 has certainly seen the approximate average of 80% beat in sales and earnings hold up, forming a pillar of support for sentiment against the bond market headwinds. Despite the current backdrop, the market is still expected to observe the 11% of company reports on the S&P 500 , Cisco Systems and Coca-Cola for the Dow. The local Straits Times Index (STI) would notably be seeing a substantial list of company reports including the remaining of local banks on Wednesday, which may have investors hunting further upsides.