U.S. futures indicate a modest uptick with the S&P 500 futures rising by 0.1%, while Dow Jones Industrial Average futures remain flat. However, it's crucial to note that changes in futures may not reliably forecast market movements post the opening bell. In Europe, the Stoxx Europe 600 sees a marginal gain of 0.1% during morning trading, with notable stock movements such as Flutter Entertainment and Viaplay Group Series B on the rise, while EQT and HelloFresh experience declines. The FTSE 100 in the UK remains steady, while France's CAC 40 and Germany's DAX show slight increases.

The Wall Street Journal Dollar Index registers a 0.1% decline, standing at 97.94. Moving to commodities, Brent crude edges up by 0.2% to reach $78.00 a barrel, and WTI crude sees a 0.5% increase, settling at $72.89 a barrel. In the bond market, the German 10-year Bund yield maintains stability at 2.318%, while the U.S. Treasury's 10-year yield experiences a minor dip of 2 basis points, reaching 4.087% from 4.109%. It's worth noting the inverse relationship between bond prices and yields.

In the Asian markets, Japan's Nikkei 225 remains flat, while Hong Kong's Hang Seng demonstrates a gain of 0.8%. China's Shanghai Composite outperforms with a 0.4% increase. As global markets exhibit varied performances, the interplay between economic indicators, geopolitical events, and commodity prices continues to shape investor sentiment.

Amidst these fluctuations, investors navigate a landscape influenced by global economic conditions and regional dynamics. The nuances of stock movements, currency valuations, and commodity prices underscore the intricate nature of the interconnected global financial system. As the trading day unfolds, the collective impact of these factors contributes to the broader narrative of market trends and investor sentiment.

The current snapshot of global markets reveals a mix of modest gains and fluctuations in various indices, currencies, and commodities. The ongoing dance between market forces and economic indicators sets the stage for a dynamic trading day. Investors remain vigilant, recognizing the potential for shifts in sentiment as they interpret the evolving landscape of global finance. The story of today's markets unfolds, shaped by a myriad of factors that together contribute to the ever-evolving narrative of the financial world.

Cautioning against hasty interest rate cuts, a top IMF official, Gita Gopinath, emphasizes the risk of investor expectations for looser monetary policy reigniting inflation. Gopinath suggests a "bumpy" path toward lower inflation, advising central banks to delay rate cuts until the second half of the year. In the face of market expectations and potential economic implications, central banks grapple with the delicate balance of addressing inflation concerns while avoiding premature rate reductions.

Despite a rapid decline in headline inflation last year due to unwinding supply shocks, Gopinath points out that strong labor markets are sustaining stickier services price inflation in the US, Eurozone, and elsewhere. The IMF official's cautionary tone highlights the importance of central banks proceeding with prudence to avoid setting off a chain reaction of excessive rate cuts fueled by market expectations. Gopinath contends that the job is not yet complete, urging central banks to tread carefully as premature rate cuts can solidify expectations for further easing.

Market reactions intensify as European Central Bank President Christine Lagarde dampens hopes of rate reductions in the spring, contributing to a sell-off. This aligns with Gopinath's perspective, emphasizing the divergence between central bank and investor expectations regarding the timing and extent of rate cuts. Lagarde's cautious stance revolves around waiting for more information on wage pressures before considering any decision to lower borrowing costs.

The IMF's warning gains significance amid concerns that easier financial conditions, driven by recent market rallies, may undermine efforts to curb inflation with high official interest rates. Gopinath cautions against adding fuel to the situation by speculating on rate cuts, emphasizing the need to avoid compromising the forces that could drive demand down. The IMF's historical perspective warns against premature celebrations, noting instances where central banks relaxed after an initial fall in inflation, only to witness a plateau or resurgence in price growth.

In the UK, hopes for policy easing face a setback as official figures reveal an acceleration in headline inflation to 4 percent in December, the first rise since February. Lagarde's comments on the ECB's cautious approach jolt markets, which had anticipated a rate cut by April. Annual price growth in the Eurozone slows after a peak in October 2022, prompting concerns about persistently high inflation in the labor-intensive services sector.

As discussions unfold at the World Economic Forum, Lagarde and other central bankers stress the importance of staying restrictive for as long as necessary to ensure a sustained decline in inflation. The risk of moving too fast on rate cuts and having to reverse course looms large, echoing the sentiment that caution is imperative in the current economic landscape. Klaas Knot, head of the Dutch central bank, supports Lagarde's stance, emphasizing that market pricing may be overly aggressive in anticipating rate cuts.

Amid the ongoing debate, analysts suggest that the ECB is likely to delay rate cuts until June, allowing more time to assess the medium-term outlook for underlying inflationary pressures comprehensively. The disparity between market expectations and the cautious approach of central banks underscores the complexity of navigating monetary policy in the face of evolving economic conditions.

The IMF's Gita Gopinath's warning resonates in a landscape where central banks grapple with divergent expectations and economic uncertainties. The delicate balance between addressing inflation concerns and avoiding premature rate cuts underscores the challenges faced by policymakers. As markets react to statements from central bank officials, the broader economic implications of monetary policy decisions remain uncertain. Caution prevails as central banks navigate a complex terrain, emphasizing the need for prudence in the face of persistent inflationary pressures.

Workers in Europe are hoping this year's pay round will help restore incomes eroded by higher prices, but the expected boost to their purchasing power could hamper the European Central Bank's efforts to bring inflation back to target.

The ECB has singled out wages as the single biggest risk to its 1-1/2 year crusade against inflation. It expects salary growth across the euro zone of 4.6% this year, far more than the 3% pace it considers consistent with inflation at its 2% target.

Higher wage settlements would be a risk to interest-rate cuts that financial markets are betting will start in April.

"We see a path to 3% (wage growth) but it will be a bumpy road," Reamonn Lydon, an economist at the Central Bank of Ireland and one of the minds behind the popular Indeed Wage Tracker, said in an interview.

Pay hikes increase costs for firms and boost household income, both factors that might push up prices and require the ECB to keep rates high.

Unions see a combination of gradually cooling inflation, low unemployment and fat corporate profit margins as their best and possibly last shot this economic cycle at restoring workers' living standards.

And after seeing their real wages drop by roughly 5% in 2022-23 - and decades in which labour has lost its leverage - wage-earners are ready to fight. U.S. giants Tesla and Amazon are among companies already grappling with strikes in Europe.

Unlike in the United States, there is no real-time wage data for the 20-country euro zone.

But the Indeed Wage Tracker, which measures salaries advertised on that website, is closely watched by the ECB as an indicator of future trends. It ticked higher in December - to 3.8% from 3.7% - although that was well below a peak of 5.2% recorded in October 2022, when inflation was at its peak.

Lydon and Indeed's Pawel Adrjan said December's increase was probably driven by new wage deals, an effect they saw continuing in early 2024 as more agreements are struck and minimum wage increases kick in.

Among recent settlements, wages rose by 4.5% for employees at Spanish stores of and IKEA, 5.0% at French energy major TotalEnergies and 6.6% for Dutch rail workers. French Uber drivers' minimum hourly rate rose 17.6%.

Minimum wages were meanwhile lifted by 3.4% in Germany, 3.8% in the Netherlands and 5.0% in Spain.

"Everything points to a return to real wage growth," said Martin Hoepner, a professor at the Max-Planck-Institut for the study of society in Cologne, Germany.

Emboldened by worker shortages that have only started easing, labour unions hope to reverse a trend of falling membership that accelerated with globalisation in the 1990s.

Employees at French state-owned power group EDF are demanding a 6% wage increase or they will go on strike while some German rail workers turned down an 11% rise, spread over time, because they wanted a shorter working week.

Some Amazon workers in Spain staged walkouts during the crucial holiday season and Tesla has faced blockades in Nordic countries aimed at making it sign a collective bargaining agreement in Sweden.

"At the moment the economic conditions are obviously conducive to strengthening the unions' bargaining position," Torsten Mueller, a researcher at the trade union institute, said.

But Lucio Baccaro, also a professor at the Max Planck Institute, said such "wage militancy" could backfire if it caused the ECB to keep interest rates higher to curb demand.

"If a wage-price spiral is triggered, or if the central bank fears that it is, it will intervene to cool off the economy," he said.

Baccaro advocated smaller but tax-free, one-off increases like those deployed by Germany, which are set to expire at the end of this year, adding they could be financed by taxes on excess corporate profits.

So far there are few signs of a wage-price spiral, as ECB policymaker Mario Centeno pointed out.

And most economists expect companies to absorb the higher wage costs this time - not least because of the overall stagnant outlook for the European economy.

"Given that aggregate demand is more depressed now than in 2022-2023 also due to the rate hikes, firms might be more willing to allow this to happen to boost sales," said Mattias Vermeiren, a professor at Ghent University.

But the latest wage settlements have strengthened investors' confidence that higher wage growth is here to stay. With rising trade protectionism reducing companies' access to cheaper labour markets, that points to higher inflation and rates.

"Labour is taking a greater share of the pie again," Janus Henderson's European equities portfolio manager Tom O'Hara said.

"Labour and, related to that, deglobalisation are two of the strongest reasons why we think inflation persists in a way that means rates can't just pivot back to zero."

Yesterday's release of above-expected UK inflation has demonstrated how financial markets can react to a sticky inflation scenario. Understandably it saw investors rein in their expectations of Bank of England easing. Looking at the UK Sonia short-term interest rate curve, it was the March 2025 contract that spiked the most (+27bp) closely followed by the December 2024 contract. The UK sovereign bond curve rose by roughly 20/21bp and marginally bear flattened. The benchmark FTSE 100 equity index was off 1.5%, with the interest-rate sensitive real estate sector off 3.5%. And sterling was modestly firmer - typically bearish flattening is positive for G10 currencies.

We mention all this because investors will be wary that the US could suffer something similar this quarter - or at least will want inflation event risks to pass before deploying their capital further this year. The gifts that keep on giving - the speeches of the Fed's Christopher Waller - tell us that 13 February is going to be a big day for financial markets. Not only is it the release of the US January CPI figure but also of the annual 2023 benchmark inflation revisions. Christopher Waller made a point of highlighting these revisions in a recent speech. Investors will probably want to wait for this release before, for example, looking to rebuild short dollar and long risk positions.

Back to the short term, today sees slightly more settled market conditions, and on the US calendar are housing starts and initial claims - probably not market movers. Speaking on the economic outlook today is the Fed's Raphael Bostic - a centrist. In terms of price action, dollar bulls will probably be rather disappointed that DXY is not trading closer to 104 than 103 - given higher US rates and the strong US retail sales data released yesterday. We are bearish on the dollar this year, but as we discussed in our recent FX Talking, patience is required. That can probably mean DXY does trade in a 103-104 range in the near term and potentially even into further event risks this month of the US quarterly refunding announcement (29 January) and the FOMC meeting (31 January).

As above, we thought EUR/USD should be trading closer to 1.08 than 1.09 on yesterday's set of data and market developments. Probably worth mentioning is that developments in the Middle East have not yet been hitting the euro since energy markets (both crude oil and natural gas) remain subdued.

For today, the highlight will be the release of the European Central Bank minutes at 13:30 CET and President Christine Lagarde speaking on a panel at 16:15 CET. Her message yesterday was a little mixed. Like other ECB members, she presented a view that aggressive market pricing of the ECB easing cycle was self-defeating - i.e. if the market softened financial conditions too much the ECB would not cut rates. But then she said the ECB would cut rates in the summer.

EUR/USD may well trade in a tight 1.0880-1.0950 range today, but given the above event risks, we see no reason to change our current forecast of 1.08 for the end of 1Q.

Investors took about 20bp out of the 2024 Bank of England easing cycle yesterday. That move supported sterling across the board and especially against a cross rate we highlighted yesterday, GBP/CHF - more on the Swiss franc below. We have been mentioning it in some of our publications recently, but it looks like we will probably have to cut our EUR/GBP forecasts soon. Our current forecasts of a move up to 0.88 later this quarter and 0.90 later this year look too aggressive.

The inflation data also helped GBP/USD hold support at 1.2600 yesterday and 1.26-1.28 looks a likely near-term range until the broader dollar trend resolves itself.

EUR/CHF is moving higher. This is in contrast to a typical move one might see during periods of geopolitical stress. What is driving EUR/CHF now, however, and what drove it sharply lower late last year is rate differentials between the eurozone and Switzerland. These differentials had a sharp move in favour of EUR/CHF yesterday after the Swiss National Bank President Thomas Jordan said that strength in the Swiss franc was having a material impact on the Swiss inflation outlook - i.e. depressing it. This can be seen with the sharp rise in the real trade-weighted Swiss franc. In effect, while the ECB might be pushing back against easing expectations, the SNB is pushing in favour of those easing expectations given the franc is too strong.

We think EUR/CHF can trade back up to the 0.96 area over the next three months as ECB easing expectations are further reined in. We would also expect another dose of the same dovish commentary from SNB's Jordan when he speaks at 11;30 CET today in Davos.

The year 2024 is poised to bring about significant transformations in the realm of digital assets, especially Bitcoin. Following the recent approval by the SEC for a spot Bitcoin ETF and the upcoming Bitcoin halving event scheduled for April, notable shifts in both supply and demand are anticipated. A comprehensive understanding of these changes is crucial to grasp the potential role of digital assets in fostering global financial accessibility.

On the demand side, the potential approval of a spot Bitcoin ETF by the SEC is expected to open doors for numerous new investors seeking direct exposure to Bitcoin's price within their traditional investment accounts. This eliminates the complexities associated with dealing with crypto exchanges, providing access through a familiar investment vehicle—the ETF. Consequently, this development is anticipated to stimulate increased liquidity and greater price stability in the Bitcoin market. Additionally, the SEC's approval signifies a significant milestone in establishing Bitcoin's legitimacy within established financial institutions.

Regarding the supply aspect, Bitcoin's scarcity undergoes an approximately four-year cycle with each halving event. The halving event involves reducing the reward for Bitcoin miners by 50%, thereby cutting the rate of new Bitcoin issuance. With the next halving event slated for April 2024, the block reward will decrease from 6.25 to 3.125. This scarcity mechanism contributes to the unique dynamics of Bitcoin's supply, influencing its value in the market.

Analysts have proposed that the BTC halving event in 2024 may trigger a positive sequence of events, driven by a combination of macroeconomic and technological factors. "Predicting precise post-halving prices is challenging due to the intricate interplay of various factors. Investors should approach the halving event with a comprehensive strategy, taking into account historical patterns, regulatory changes, technological advancements, and broader market conditions.

Diversification and a nuanced understanding of the evolving crypto landscape remain crucial for navigating potential opportunities and risks," emphasized Sumit Ghosh, co-founder and CEO of Chingari, a Web3.0 live streaming application.

Apprehensions regarding whether block rewards will suffice to sustain miners following the halving could be alleviated if the price of bitcoin were to double.

Up until now, the trend looks promising. Examining prices 200 days after the previous three bitcoin halvings reveals that BTC has already experienced a 50% rally, driven largely by the excitement surrounding Bitcoin ETF bids from entities like BlackRock.

This performance surpasses the lead-up to the two preceding halvings. Before the 2020 halving, Bitcoin had only increased by less than one third at this stage, while in 2016, it had actually declined by 3%.

Investors continue to come back to their senses and the latter involves trimming the interest rate cut expectations that went ahead of themselves over the past few months. Yesterday, the Federal Reserve's (Fed) Beige Book survey suggested that resilient consumer spending during the holiday season helped propel the US economy, and another solid rise in the US retail sales confirmed that spending in the US didn't slow by the end of last year. On the contrary, the latest data printed its highest pace in three months. As such, robust economic data added to the thinking that, yes, maybe March is too early for the Fed to announce the first rate cut; there is no apparent reason for the Fed to rush to the rate cuts as early as in March. The Fed will likely start cutting in the H1 but March seems overly optimistic given the ongoing strength of the economic data. The probability of a March cut fell to around 60% from around 80% at the start of the year, the US 2-year yield advanced 25bp since the start of the week, the 10-year steadies above the 4%, the US dollar index is pushing higher, the S&P500 comes under fresh selling pressure near peak, and volatility is rising. Given how far the Fed doves and the market bulls pushed their rate cut bets over the past months, there is room for further downside correction in both stock and bond markets, and potential for a further recovery in the US dollar against most majors.

Central bankers, bank CEOs and other influential figures continue to talk in Davos. They continue to push back on the interest rate cut expectations, they highlight the need to consider the upside risks for inflation due to the rising geopolitical tensions and they continue to warn that the market's optimism regarding the rate cuts may have the opposite impact on rate policies: too much optimism could delay the rate cuts. European Central Bank (ECB) Chief Christine Lagarde warned in Davos yesterday that overly optimistic rate cut expectations don't help the central banks' fight against inflation – as they loosen the financial conditions prematurely. She, however, hinted that the ECB will likely cut rates by, or in summer. And this was the first time we heard the ECB Chief loudly considering rate cuts.

The market and the central bankers have started to move toward each other, but the time gap between when investors price in the first cuts and when central bankers contemplate rate reductions should continue narrowing to find an optimal balance and that should involve a deeper downside correction in stock and bonds, and a further recovery in the US dollar.

The EUR/USD tested the 200-DMA to the downside yesterday and price rebounds could be interesting opportunities for building fresh shorts targeting the 1.0770/1.08 range. Cable is better bid above the 50-DMA after a surprise rebound in the UK's December inflation numbers weakened the Bank of England (BoE) doves' hands yesterday. Cable is testing the 1.27 offers, with a limited upside potential, however, given that the Fed rate cut expectations are being cut, and when the Fed is in play, the other central bank expectations must wait their turn to speak up. In Japan, the USD/JPY advanced to 148.50, a move that no one saw coming by the end of last year when the Bank of Japan (BoJ) normalization bets started fueling long positions in the Japanese yen. Data released this morning showed that the Japanese core machinery orders fell 5% in November, calling for a supportive BoJ, rather than a rate hike.

Earlier this week, China printed a 5.2% growth for last year – not a major achievement, mind you, as the 5% rebound from the pandemic crash matched nothing better than a meagre 2% growth compared to a non-Covid year. Industrial production was better than expected in December while retail sales grew slower. Chinese equities barely reacted to the news of a trillion-yuan worth stimulus earlier this week. The selloff in the CSI 300 accelerates as the focus remains on developing deflation and worsening property crisis. The Aussie feels the pinch of soft China, soft jobs figures and stronger US dollar. The AUD/USD sank below the 200-DMA and is preparing to test the 100-DMA, at 0.6510, to the downside. The AUD/USD outlook turns neutral from positive, the only thing that could slow the Aussie's selloff against the greenback is technical indicators hinting that the pair will soon step into the oversold conditions.

In energy, crude oil is better bid and the barrel of American crude is testing the $73pb – again this morning on the Red Sea tensions and on OPEC forecast that global oil demand will grow by a robust 1.8 mio barrels per day next year, exceed growth in supplies and keep the market in deficit. Of course, the OPEC forecasts should be taken with a pinch of salt as they have an interest in making the numbers look in favour of them. But what's real is the sharp decline in shipping transits through the Red Sea region, which will continue to push the shipping costs higher, could squeeze the energy markets and throw a floor under the oil selloff near the $70pb level.