U.S. investors returned from the extended weekend in a cautious mood, with equity index futures softer as traders eyed benchmark borrowing costs climbing back towards 4% and awaited the resumption of the corporate earnings season.
Treasurys were playing catch-up to Monday’s jump in German bund yields after European Central Bank governing council member Robert Holzmann said in an interview at Davos that lingering inflation may stop the ECB from cutting interest rates this year.
Though Holzmann is a renowned monetary hawk, his push-back against the market’s hopes for swift rate cuts in 2024 dovetails with recent attempts by Federal Reserve officials to damp expectations of how quickly the U.S. central bank also may ease policy this year.
“I sense that the first quarter of this year will be marked by the realization that it’s too early for the central banks to cut the interest rates unless something really bad–like another bank crisis, or a real estate crisis, or another debt crisis hits the fan,” Swissquote Bank said.
Fed Governor Christopher Waller will speak on the economic outlook and monetary policy at 11 a.m.
Meanwhile, heightened tension in the Middle East is raising fears that the disruption of shipping through the Red Sea may add to inflationary pressures.
SPI Asset Management noted that despite recent airstrikes against them, Yemen’s Houthi said they will continue to assault ships in and around the Red Sea. “Its hardly surprising risk is a bit unstable this morning.”
Along with the monetary policy debate and geopolitical ructions, investors will also have an eye on the resumption of the fourth quarter 2023 earnings season.
“We go into [fourth-quarter] earnings season with subdued expectations for corporate profits but relatively high valuations, balanced on a fulcrum of anticipated Fed rate cuts and lower long term interest rates, ” DataTrek Research said.
“A wide range of expected results by sector should keep overall market volatility low as we see companies report results. While this is not the usual setup for a big market rally over the next 4-6 weeks, it should be enough to keep stocks grinding higher.”