Markets Lower as Earnings Season Kicks Off

STOCK INDEX FUTURES

The indexes are lower as more large bank earnings hit the slate, while markets watch for a potential Supreme Court ruling over President Trumps tariffs and signs of a possible US intervention in Iran. All major indexes are down ahead of the bell as Bank of America and Wells Fargo both posted a surge in profit as trading activity powered results. The results came after JP Morgan Chase kicked off earnings season Tuesday with an underwhelming release. Worries rose about US action against Iran are also present. President Trump has ramped up military threats in response to a deadly crackdown on public protests. The US will also be withdrawing personnel from key bases in the region as a precaution given heightened regional tensions, a US official told Reuters on Wednesday.

On the data front, retail sales grew 0.6% on the month in November, a rebound from October’s dip of -0.1%. the biggest increases were seen in sales for sporting goods, hobby, musical instrument, & book stores (1.9%); miscellaneous store retailers (1.7%); gasoline stations (1.4%); building material and garden equipment suppliers (1.3%); and motor vehicle & parts dealers (1%).

Meanwhile, US producer prices rose 0.2% in November, up from a 0.1% increase in October and coming in line with forecasts. Core PPI was unchanged on the month, slowing sharply from a 0.3% rise in October and below forecasts of a 0.2% increase. The data comes after a mild CPI reading for December, which added to bets that the Fed will hold on rates for the next couple of months. Core prices rose 0.2% during the month, below expectations. Core CPI rose 2.6% on the year in December, edging down from November’s 2.7% and also below expectations, while headline inflation held steady at 2.7%. Markets have shrugged off concerns over the DOJ’s grand jury subpoena on Fed Chair Powell as several big-name CEOs, foreign central banks, lawmakers, and various industry executives have issued statements in support of the Chair.

CURRENCY FUTURES

US DOLLAR: The dollar steadied on Wednesday following the release of PPI and retail sales data for November. The  dollar gained on Tuesday following December’s inflation print, which showed core price pressures eased in December, while headline prices remained stable. Fed Chair Powell has suggested that the impact of tariffs on inflation will peak in the first quarter and then subside. The dollar has largely recovered most of its losses from the beginning of the week after Fed Chair Powell said the Department of Justice had served the Fed with grand jury subpoenas. Markets have seemingly shrugged off the news, while attention is now centered around a possible US Supreme Court ruling on the Trump administrations tariffs today. A ruling against the administration could pressure the dollar and bond markets, but details over the specific laws will need to be thoroughly reviewed regarding its implications. Currently, markets are pricing in a 3% chance of a rate cut at the January meeting, with a rate cut not fully priced in until the June meeting.

EURO: The euro edged higher against the dollar in what has been a relatively dry week of data for the eurozone, leading focus to Germany’s GDP data tomorrow. European Central Bank member François Villeroy de Galhau said on Tuesday that expectations of an ECB rate hike this year are “fanciful.” The ECB left policy rates unchanged in December and raised some growth and inflation forecasts, reinforcing market expectations that rates will remain on hold for an extended period. Eurozone inflation figures showed that consumer prices rose 2.0% year over year in December, while core inflation edged down to 2.3%. The data has reinforced views that the central bank is set to stand pat on rates for 2026, while markets look for any clues in economic data for policy cues in 2027.

BRITISH POUND: The pound is higher against the dollar as traders prepare for UK GDP data tomorrow, which is expected to show an improvement in growth amid a potential recovery in manufacturing conditions following the cyberattack on Jaguar Land Rover, which slowed production. Industrial production and the RICS house price survey for December will also be out Thursday, offering a glimpse into demand for homes following the passing of Reeves’ budget. On the political front, Prime Minister Keir Starmer said he would stay the course when recently asked if there were any circumstances in which he could stand down if a poor showing in local elections in May prompts a challenge to his leadership. A possible challenge to leadership could raise concerns about a potential shift to the left, creating renewed unease over fiscal risks. Traders will continue to focus on policy outlooks between the Fed and the Bank of England, as both central banks are expected to lower rates at least once in 2026. The BoE lowered rates by 25 bps last month, although officials at the bank cautioned that the pace of easing could slow as the bank does not want to jump the gun on inflation. Money markets suggest the next rate cut could come in April or June, with the latter meeting being fully priced in for a cut.

JAPANESE YEN: The yen recovered overnight losses to start the morning higher against the dollar after hitting its lowest level in a year-and-a-half at 159.45. Concerns about looser fiscal and monetary policy in the country have continued to weigh on the currency since the election of Takaichi, and news that Takaichi may hold a snap election has continued to exacerbate those pressures. Takaichi’s policies favor big spending and a dovish Bank of Japan stance, have recently weighed on the Japanese currency and a strong electoral victory could pressure the yen further. The news has seen JGBs reach new local highs as concerns about fiscal expansion grow. Markets are favorable for a July rate hike from the Bank of Japan, though wage negotiations and updated forecasts on the economy do present opportunities for odds to shift earlier in the year. Governor Kazuo Ueda has said the BOJ would continue to raise borrowing costs if economic and price developments move in line with its forecasts.

AUSTRALIAN DOLLAR: The Aussie is little changed against  the dollar as traders await domestic data out of the continent for further clues on how central bank policy could unfold in 2026. A concern for the Reserve Bank of Australia remains persistently high inflation. The release of the November household spending indicator later in the week will also draw close attention, amid growing evidence of a broad-based economic recovery partly driven by consumer demand. If household spending shows a sharp pre-Christmas increase, the RBA might be more inclined to begin raising rates sooner than expected. Markets imply a 27% chance that the RBA will raise the 3.6% cash rate by a quarter point when it meets on February 3, though that rises to 76% by May. Data out last week showed that consumer prices rose 3.4% on the year in November, below forecasts for 3.6% and a drop from October’s reading of 3.8%. Trimmed mean CPI, which is a key measure of core inflation for the Reserve Bank of Australia, rose 0.3% in November and 3.2% for the year, staying well above the target 2%. Capacity utilization, housing demand, facets from GDP data, and other indicators have all recently posted hotter-than-expected readings. Still, the central bank sees the monthly inflation figures as volatile and places greater emphasis on its quarterly inflation report, which is due in late January.

INTEREST RATE MARKET FUTURES

Yields edged higher across the curve, showing little reaction to PPI and retail sales data for November. Fedspeak will be in play today as markets look for any further signals on how monetary policy could proceed following December’s CPI report.  December’s inflation figures  revealed moderate but sticky inflation, with headline prices up 0.3% on the month and 2.7% year over year, while core inflation rose 0.2% on the month and 2.6% on the year. Services inflation remained sticky, with notable increases in recreation, airline fares, medical care, and lodging, highlighting why inflation progress has slowed even as headline readings stabilize. However, the data is not very likely to shape opinions on how to move on monetary policy. Several officials have recently reiterated the policy remains in a good place, while the bank waits to see how current economic conditions play out and in conjunction with last Friday’s jobs report, the Fed does appear well positioned to wait on policy for the near term.

Markets have seemingly moved on from Sunday night and Monday’s selloff the stemmed from an announcement from the Fed that Chair Powell was facing criminal prosecution over the Fed’s recent renovations. The bank released a video Sunday night, with Chair Powell accusing the administration of using the threat of criminal prosecution to pressure the central bank into lowering rates. Powell framed the move from the Justice Department as a head-on challenge to the central bank’s independence. A criminal investigation of a sitting chair is without precedent.

The spread between the two- and 10-year yields is 63.20 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.524%.

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