Investors will closely monitor more information about the consumers' sentiment and the direction of interest rates. CPI data for January will dominate.

Economists forecast a 0.4% increase in headline CPI monthly and a 6.2% gain from the prior year. Market observers also expect the CPI reading to help dictate the Federal Reserve’s next move on interest rates.

The central bank last implemented a 25-basis point interest rate hike, while Fed Chair Jerome Powell noted inflation was starting to come down but had a long way to go. More than the central banks’ rhetoric, we think the inflation data will dictate the direction of the markets from here.

Last week, the Nasdaq index's weak performance showed that the market is nervous about confirmation from the CPI report that more work needs to be done before the Fed can ease. All three indexes finished the week lower, the first time since December. The Nasdaq snapped a five-week winning streak with its 2.4% weekly decline.

Markets seemed to be digesting the previous week’s news, which included the Federal Reserve’s 0.25-point increase and a surprisingly strong jobs report. With the fourth-quarter earnings season more than halfway through, fewer companies are topping Wall Street profit expectations than usual.

Some traders said that the 3rd of Feb jobs report raised the possibility that tightening could last longer than they had hoped. The US added 517,000 jobs last month, far more than analysts were expecting, and the unemployment rate of 3.4% was the lowest since 1969.

A strong jobs report is usually good news, but in the topsy-turvy world of Wall Street, it can be bad news for stocks. A robust labour market could encourage the Fed to keep rates higher for longer to curb the economy.

All three indexes finished January higher, including an 11% rise in the Nasdaq, mainly because investors had expected the Fed to end its campaign to raise interest rates and, eventually, lower them. Thus, if the CPI data tells a story that inflation slowing down is much slower than what traders currently expect, we saw a chance for stock prices to retreat further, with a meaningful gain in USD.

One specific piece of news to take note of Oil prices rose last week after Russia said it plans to cut output by 500,000 barrels daily, starting in March. Global crude benchmark Brent climbed 2.2% to trade at $86.39 a barrel.

WTI closed on Friday, being its best week since October. It rose 8.63% last week, marking its best week since 7th Oct, when WTI gained 16.54%. This was also its first positive week in three weeks. Lower Russian production and China’s reopening should tighten the oil market further over the coming quarters.

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Fullerton Markets Research Team
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