The ECB left rates unchanged and is planning its first cut for the summer. Inflation in Japan continues to slow down

Today, the US will release data on the PCE index, which is considered the favorite inflation indicator for the US Federal Reserve. The PCE index differs from the CPI in that it measures only goods and services intended for and consumed by individuals. Prices are weighted according to total expenditures for each item, which provides an important insight into consumer behavior. Following the CPI and PPI reports, economists expect the core PCE deflator to fall below 3% y/y for the first time since March 2021. Therefore, a decline in the PCE index is likely to harm the dollar index, lending confidence to risk assets and indices. On the contrary, if the PCE data points to growth, the US dollar will get additional support, which will hurt indices and gold.

Germany’s IFO Business Climate Index for January unexpectedly fell by 1.1 to a 3-year low of 85.2, weaker than expectations of a rise to 86.6. The European Central Bank, as expected, left its main refinancing rate unchanged at 4.50% and said that this level should be maintained for a long enough time to ensure that inflation returns to the 2% level in time. ECB President Lagarde stated that the Eurozone economy will likely stagnate in the last quarter of 2023. Ms. Lagarde also added that borrowing costs could be lowered in the summer.

WTI crude futures rose sharply on Thursday as China “hinted” to the Houthis that it would worsen business relations with Beijing if they did not stop attacking ships in the Red Sea. That helped ease market fears of supply disruptions. The US crude stockpiles fell by 9.2 million barrels last week, beating market expectations and marking the biggest decline since August. The drop in inventories is also helping to boost oil prices.

Natural gas prices initially rose on Thursday after the EIA reported that natural gas inventories fell by 326 billion cubic feet last week, beating expectations of 318 billion cubic feet. However, prices gave up gains and declined after NatGasWeather reported that temperatures in the US would remain “exceptionally warm” from February 1 to February 8, reducing demand for gas for heating.

Asian markets rallied strongly yesterday. Japan’s Nikkei 225 (JP225) for yesterday rose by 0.03%, China’s FTSE China A50 (CHA50) jumped by 1.75%, Hong Kong’s Hang Seng (HK50) ended Thursday up by 1.96% and Australia’s ASX 200 (AU200) was positive by 0.48%.

The core consumer price index in Tokyo, Japan, came in at an annualized 1.6% in January 2024, slowing from 2.1% in December and below market expectations of 1.9%. January’s reading was also the lowest since March 2022 and below the central bank’s 2% target for the first time since May 2022, breaking 19 months of above-target readings. The easing of inflationary pressures is mainly due to lower energy prices. This increases the likelihood that the BOJ will keep monetary policy accommodating. Nevertheless, BoJ Governor Kazuo Ueda recently said that the probability of sustainably achieving the 2% inflation target through wage growth is gradually increasing and that the central bank will review its massive stimulus program if this trend continues.