The economic landscape in the United States continues to be shaped by the Federal Reserve’s monetary policy, which remains a pivotal element in assessing both market behavior and inflation trendsIn December, the Producer Price Index (PPI) indicated a year-over-year increase of 3.3%, falling short of many analysts’ expectationsOn a month-over-month basis, the growth rate slowed to 0.2%. When excluding food and energy, the core PPI stood flatIn the aftermath of this data release, the US dollar and short-term Treasury yields saw declines, while gold prices experienced a surge and US stock indices initially rallied.

The forthcoming Federal Reserve meeting, scheduled for January 28-29, is generating considerable speculation amongst traders, who currently see a greater than 97% chance of interest rates remaining unchanged in January and a 77.9% probability of the same in March

Meanwhile, predictions suggest the first interest rate cut could arrive by September of this year, culminating in an anticipated reduction totaling approximately 29.4 basis points by year-end.

The market’s reaction to the initial PPI data suggested a slim chance for further Fed rate cuts, yet no clear signals were provided about the direction of monetary policy moving forwardWith the Consumer Price Index (CPI) report set to be released on Wednesday, market expectations hover around a 2.9% increase year-over-year, which would be an uptick from November’s 2.7%, along with a projected month-over-month rise of 0.3%. Analysts have warned that if CPI data exceeds expectations, it could spell trouble for the stock market, as it would indicate that the Federal Reserve might defer its rate-cutting plans.

Despite this, some analysts argue that it is improbable for the market to revisit its pricing solely based on the impending CPI report, noting that all eyes are fixed on the new government

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The onset of the fourth-quarter earnings season for major banking institutions is expected to bring new developmentsMajor players like JPMorgan, Citigroup, Goldman Sachs, and Wells Fargo are scheduled to release their earnings on Wednesday, with Morgan Stanley and Bank of America following suit on ThursdayAdditionally, the UK’s CPI data release is anticipated, as the nation’s assets remain under pressure.

On the Tuesday following the PPI announcement, US stocks experienced a tumultuous session resembling a rollercoaster rideThe stock market initially surged due to the PPI data but began to turn bearish approaching middayFollowing several fluctuations throughout the day, a wave of panic buying propelled small-cap stocks to lead gains, despite the dismal performance of large technology firmsNvidia faced its fifth consecutive day of declines, culminating in an overall drop of 12%. Investors pivoted towards sectors such as utilities, financials, and materials, leading regional bank ETFs and bank sector ETFs to post gains in excess of 3%.

As observed, the three major US stock indices reacted differently, with only the Nasdaq sinking

The S&P 500 index closed slightly higher by 6.69 points, or 0.11%, at 5842.91 points, while the Dow Jones Industrial Average rose by 221.16 points, or 0.52%, settling at 42518.28 pointsConversely, the Nasdaq composite index fell by 43.71 points, or 0.23%, to close at 19044.39 points, and the Nasdaq 100 index also decreased by 0.13%. The Russell 2000 small-cap index, more responsive to economic cycles, managed to advance by 1.13%. Meanwhile, the fear index, known as VIX, dropped by 2.40% to 18.73, underlining the turbulent market environment.

In light of industry-specific ETFs, most sectors reported an upward trendRegional bank ETFs surged by 3.41%, while broader bank sector ETFs climbed 3.3%. Other sectors including global airline, utility, financial, and energy ETFs reported gains of at least 1.07%. However, the healthcare sector faced challenges, with healthcare ETFs declining by 1.03% and biotechnology index ETFs dropping by 1.83%.

From an investment strategy perspective, January has seen retail clients of Bank of America pouring funds into the US stock market at a pace faster than usual, with inflows exceeding the average

As of January 10, retail investors have purchased US stocks for five consecutive weeks, favoring individual stocks over ETFs, resulting in the largest outflow from ETFs in one yearInstitutional investors were net buyers of smaller amounts, while hedge funds have sold off assets for the sixth week running.

Within the prominent "Tech Seven" stocks, declines were noted across the boardMeta Platforms saw a drop of 2.31%, Tesla fell by 1.72%, and Nvidia, facing its prolonged downturn with a cumulative loss of 12%, decreased by 1.1%. Other tech giants included Alphabet, which dipped 0.71%, Apple with a 0.48% fall, Microsoft dropping 0.36%, and Amazon decreasing by 0.32%. In light of emerging regulations, the European Union is reassessing investigations into tech behemoths like Apple, Meta, and Google, while the UK’s antitrust regulators have launched inquiries into Google’s search services.

In the realm of artificial intelligence stocks, performances varied widely

Serve Robotics rallied by 11.03%, BigBear.ai climbed 6.71%, and CrowdStrike increased by 1.93%, to name a fewHowever, semiconductor stocks fluctuated before closing higher, driven by interest in AI technologies, although Nvidia holdings such as SoundHound AI and BullFrog AI reported slight declinesOverall, AI remains a mixed bag within current investment climates.

On the European front, stocks similarly experienced a rise then fall, with the pan-European STOXX 600 index rising by over 0.6% before ultimately closing down 0.08%, marking a third consecutive day of declinesEnergy stocks notably dragged the market down, with oil and gas sectors experiencing a 0.73% decline, primarily attributed to BP’s disclosure of decreased refining margins leading to a projected profit drop of up to $300 million for the fourth quarter.

The German DAX 30 index managed to close higher by 0.69%, breaking a four-day losing streak

Likewise, the French CAC 40 index rose by 0.20%, concluding two consecutive days of losses, while the Dutch AEX index dipped marginally by 0.03%. The Italian FTSE MIB index rose by 0.93%, while the UK FTSE 100 index fell by 0.28%, marking its third successive declineThe Spanish IBEX 35 index rose by 0.55% amid various performance trends across sectors.

In retail updates, UK sportswear retailer JD Sports Fashion revised its profit guidance downward, leading to a drop exceeding 10%. Conversely, UK grocery retailing group Ocado reported record-breaking Christmas sales, leading its shares to rise by 9.52%.

Subsequent to the PPI release, short-term US Treasury yields fell, while longer-term yields experienced an initial downturn before rallying backThe yield on the 10-year Treasury saw a slight increase, hovering near a 14-month high, while the 30-year Treasury yield rose past 5% for the first time since November 2023. In European markets, sovereign debt yields generally trended upward.

The dollar index, following the PPI data, softened by approximately 0.7%, yet it remains positioned near two-year highs

The euro gained traction against the pound, climbing to a three-and-a-half-month high, despite upcoming interest rate hike expectationsIn contrast, the yen weakened, approaching the 158 mark.

The ICE dollar index slipped by 0.68%, marking a day low of 109.184 pointsWithin the day, the Bloomberg dollar index dropped 0.44%, settling at 1314.06 points, while continuously posting lower performanceThe retreat in the dollar took back gains that were made following last Friday's robust non-farm payroll data reportsNon-dollar currencies also reflected shifts, with the euro rising 0.60% against the dollar and reaching a daily high of 1.0309. The pound appreciated marginally by 0.10%, while commodity currencies like the Australian and New Zealand dollars gained groundConversely, the South Korean won saw an uptick against the dollar amid responsiveness to market shifts.

After a two-day rally during which crude oil prices rose by 6.6%, profit-taking among investors led to a decrease in oil prices