Asian equities might exhibit a cautious stance as Emerging Markets equities and US Small Caps stocks showed restraint in rallying, in anticipation of today’s key US Consumer Price Index (CPI) data release. A day devoid of major news or significant data releases set a wary mood among investors. Such market price action could be indicative of investors’ hedging tactics or their prudent approach in light of the impending U.S. CPI data hike. Currently, Emerging Markets assets are considered highly susceptible to the effects of increased US yields and the somewhat hawkish Federal Reserve stance in 2024.
It’s notable that the Fed’s forecasts suggest two rate cuts this year, yet market sentiment leans more dovish. Short-term Fed rate cut projections for 2024 are fixed at 140 basis points, maintaining the likelihood of a March cut at 70%. Higher US CPI figures, expected later today, might prompt adjustments in rate cut pricing for 2024. Given that US inflation data is today’s most pivotal, traders might reduce exposure to risk and high beta assets. The Bond market, being the most sensitive and liquid in the run-up to the data release, is under close watch. Conversely, a shortfall in both the headline and core CPI readings could reinvigorate a full 100% expectation of an initial Fed rate cut in March, potentially weakening the dollar and uplifting risk assets, especially in Emerging Markets.
