Daily Market Outlook, January 15, 2024

Munnelly’s Market Minute…“Nikkei Tests Levels Not Seen Since 1990”

Asian stocks traded within a narrow range due to the absence of significant catalysts over the weekend. Global markets were expected to have a subdued session on Monday as a result of the extended weekend in the US. The Nikkei 225 continued its upward trend, briefly reaching the 36K handle for the first time since 1990. The Hang Seng and Shanghai Composite experienced volatility after the People's Bank of China chose not to cut its one year MLF rate. In the upcoming data-heavy week, China's Q4 GDP, December industrial production, retail sales, urban investment, unemployment, house prices, and foreign direct investment will be closely watched for their potential impact on global central bank expectations.

Last week's highly anticipated US inflation report for December showed a slight decrease in core CPI inflation to 3.9%, the lowest since May 2021. However, the headline rate, which includes food and energy prices, increased to 3.4% from 3.1%, suggesting a potentially uneven path for the inflation "last mile" decline to 2%. Despite this data and warnings from Fed officials that expectations of an early rate cut may be premature, market pricing remains inclined towards a better-than-even probability of a first rate cut in March.

This week, the focus shifts to the UK's inflation data, with today's economic data slate somewhat scant, attention will be on data from the Eurozone which should offer insights into activity trends in the area. The industrial production report for November is expected to reveal a third consecutive monthly drop in output, with a forecasted 0.3% decline. Following the data release, ECB rate-setter Holzmann is scheduled to speak at the World Economic Forum's annual gathering in Davos, where his previous comments indicated a hawkish bias. No major data releases are expected from the UK or the US today, with US markets closed for Martin Luther King Jr. day. However, the Republican caucus in Iowa will see nominees vying to be the party's representative for the 2024 US presidential election. Tomorrow morning, attention will turn to the UK's wage growth trends, providing insights into the broader inflation outlook. Forecasts suggest a further moderation in headline earnings growth to 6.6% in the three months to November, compared to 7.2% in the previous period. Similarly, regular pay growth (excluding bonuses) is expected to decline to 6.6% from 7.3%. The employment and unemployment picture, amid uncertainties and the suspension of the Labour Force Survey (LFS), will likely become clearer with a "fuller" LFS-based dataset expected in February, according to the ONS.

Overnight Newswire Updates of Note

Fed’s Bostic Warns US Progress On Inflation Is Likely To Slow
Congress Unveils Temporary Spending Bill To Avert Shutdown
US Economy To Obtain Cash Boost If Congress OKs Tax Deal
US Shoot Down Cruise Missile Fired From Houthi Area, Yemen
Yemen’s Houthi Rebels Hold Military Drills Near Saudi Border
PBoC Surprise With Key Rate Unchanged, But Add Liquidity
China's Military, Government Acquire Nvidia Despite US Ban
Taiwan Elect US-Friendly President, Defying China Warnings
ECB’s Lane Says Recalibrating Rates Too Fast Self Defeating
UK Conservatives Facing 1997-Style General Election Wipeout
UK Housing Market Heats Up With Strong Jump In Asking Prices
Commerzbank Merger Talk Return As State Mulls Company Sales

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0885-90 (1.8BLN), 1.0950 (1.3BLN), 1.1000 (1.3BLN), 1.1050 (3BLN)
GBP/USD: 1.2710 (437M), 1.2775 (260M)
AUD/USD: 0.6690 (637M). 0.6720 (268M)
NZD/USD: 0.6175 (633M), 0.6195 (581M), 0.6210 (200M)
USD/JPY: 144.00 (644M) 145.00 (730M), 145.70-80 (340M)
FX implied volatility is currently at new lows for 2024, leading to familiar ranges in the FX market since Thursday's U.S. CPI data. This environment is not conducive to holding options, especially with an extended U.S. bank holiday weekend. Benchmark one-month expiry implied volatility is at new lows in all major currency pairs. Some options, such as one-month EUR/USD, USD/CHF, and GBP/USD, may offer value compared to measures of one-month daily realized volatility, but this value depends on realized FX volatility performance over the next month. Concerns about aggressive rate cut pricing could benefit currencies like EUR, GBP, and AUD if recent forecasts are accurate. Risk reversal options in major currency pairs show a decrease in USD put-over call premiums, indicating a lower perceived risk of USD strength-driven volatility.