Japanese Shares Reach 34-Year Peak, Dollar Steady Before U.S. Inflation Report
Japanese shares have reached a 34-year peak, with the Nikkei climbing to 38,010 on Tuesday. The surge in the market has been driven by foreign investors attracted by low valuations and changes in corporate governance. The weakening yen has also provided a boost. China’s financial markets are closed for the Lunar New Year holiday, leaving trading in the rest of Asia subdued. European bourses are expected to open lower, while futures for the S&P 500 fell. Investor attention is focused on crucial reports on the U.S. Consumer Price Index (CPI) and Producer Price Index, which will be released later this week.
Expectations of Rate Cuts from the Fed
Recent data has shown strength in the U.S. labor market, leading traders to scale back expectations of early and deep interest rate cuts from the Federal Reserve. The chances of a rate cut in March have been all but ruled out, with traders now pricing in a 13% chance compared to 77% a month earlier. Economists expect the CPI to rise 2.9% on a year-on-year basis, with annual core CPI inflation also expected to slow in January.
Possible Upside Surprise
There is a risk of an upside surprise in the inflation report, which could lead to higher yields and strengthen the dollar further. Traders are currently pricing in more rate cuts than projected by the Fed, with 111 basis points of cuts expected this year. The Japanese yen has fallen more than 5% against the dollar year-to-date, with analysts watching closely for any movement towards the 150 level that could trigger action from Japanese officials.
Commodities Update
In commodities news, U.S. crude futures rose slightly to $77.06 per barrel, while Brent futures were at $82.08 per barrel.
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