Wall Street Wrap

The new week began with a slight sense of calm on Wall Street, as major US indices attempted to stabilise, reverting to their December Federal Open Market Committee (FOMC) trading range after a brief dip. With a quiet economic calendar and no major news, much of the moves could be technically driven. Notably, the Russell 2000 index has returned to its key 200-day moving average (MA), a level that has provided support on two previous occasions. Holding above this critical threshold may now be crucial for buyers.

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US Treasury yields edged higher once again, with the 10-year yield rising 2.7 basis points (bp). This environment saw less rate-sensitive value sectors take the lead, with energy and materials—traditionally more resilient in inflationary conditions—topping the performance charts with gains exceeding 2%.

Look-ahead

Ahead, we look towards the upcoming US earnings season, which could help divert some focus away from the hawkish Federal Reserve (Fed) narrative. There may be some hopes in place that the streak of positive US economic data surprises over the past months may see corporate earnings hold up, displaying the resilience to weather the high-for-longer rate outlook.

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But before that, the US producer price index (PPI) release tonight will warrant some attention, serving as a leading indicator for consumer inflation. Higher input costs reflected in the PPI may have the tendency to trickle down to consumers over time, which could be crucial in shaping inflation expectations. Any upside surprise (consensus: 0.4% headline, 0.2% core month-on-month) could likely see the US dollar well-supported, which could be a trigger for more market jitters.

Asia Open

Over in Asia, the session looks set to open the week mixed, with the Nikkei down 1.27%, ASX up 0.36% and KOSPI up 0.23% at the time of writing. After a holiday break, Japan’s markets are playing catch-up following last week’s market sell-off. While there is a pause in the US dollar rally overnight, higher Treasury yields failed to provide much of a reprieve. We may expect risk-taking across the region to remain limited for now, as US inflation data looms and as Trump’s upcoming inauguration draws closer, offering more colours over how much of his trade policies will be followed through.

In the forex (FX) space, we see the USD/JPY keeping to its near-term consolidation over the past weeks. While upward momentum has stalled for now, any upside inflation surprise from the US this week could easily be a catalyst for an upward breakout. A decisive break above the 159.00 level would strengthen the case for another move higher, with the July 2024 high at 161.90 potentially coming into focus.