Dow Faces Decline Amid Powell's Cautious Stance; RBA Maintains Rates Despite Inflation Concerns | Daily Market Analysis

Key events:

• USA - FOMC Member Mester Speaks
• USA - FOMC Member Kashkari Speaks
• Canada - BoC Gov Macklem Speaks

On Monday, the Dow experienced a decline, influenced by a stumble in consumer stocks driven by McDonald's, coupled with an increase in Treasury yields following Chairman Jerome Powell's remarks dampening expectations of an imminent interest rate cut.

The Dow Jones Industrial Average dropped by 274 points or 0.7%, the S&P 500 decreased by 0.3%, and the Nasdaq Composite, dominated by tech stocks, saw a 0.2% decline.

In an interview aired on Sunday with CBS' "60 Minutes," Powell emphasized the resilience of the US economy, suggesting that the Federal Reserve could adopt a cautious approach to potential benchmark interest rate reductions, allowing more time for assessment.

Powell expressed the desire to ensure that inflation, the primary focus of the Fed's policy tightening, is indeed subsiding to the central bank's target of 2% in a sustainable manner, pending confirmation from economic data. This cautious stance on rate cuts led to increased Treasury yields, with traders revising expectations for a March cut to just 16%, significantly lower than the earlier peak of 80%. The revised outlook now anticipates only five cuts for the year, down from the previous estimate of six.

McDonald's faced a more than 3% decline as it reported fourth-quarter comparable sales growth of 3.4%, falling short of Bloomberg consensus estimates of 4.79%. The international operations of the burger chain were adversely affected by boycotts linked to the Middle East violence. The company warned of the continued impact of boycotts as long as the conflict persists, following a "meaningful" impact in Q4.

In addition to McDonald's struggles, Tesla experienced an ongoing selloff, and cruise stocks, including Carnival Corporation, showed weakness, contributing to the overall pressure on consumer stocks, which emerged as one of the weakest sectors of the day.

The Reserve Bank of Australia maintained its interest rates on Tuesday, as widely anticipated, keeping the official cash target rate at 4.35%, aligning with market expectations. Despite the prevailing predictions, the RBA asserted that inflation persisted at excessively high levels, signaling a willingness to contemplate further rate hikes if price pressures endured.

Although the decision was largely anticipated by the markets, reflecting the belief that diminishing inflationary pressures would discourage the RBA from raising rates, the central bank challenged this notion. The RBA cautioned that while inflation had recently declined, it remained "too high," contributing to an uncertain economic outlook for Australia.

The RBA reaffirmed its earlier projection, expecting inflation to return to its annual target range of 2% to 3% by 2025, with the midpoint in that range anticipated only by 2026. Over the past two years, the RBA had implemented a cumulative 425 basis points rate hike to counter a post-COVID surge in inflation.

Recent data revealed a cooling Australian economy, attributed to elevated interest rates and inflation. December's retail sales data exhibited an unexpected and substantial decline in consumer spending.

Following the RBA's announcement, the Australian dollar saw a 0.3% rise, while the ASX 200 index marginally deepened its losses.

In the global context, the US Dollar Index surged notably, buoyed by the Federal Reserve's hawkish stance, propelled by robust ISM Services data for January.

On Tuesday's Asian session, the Japanese Yen edges upward, though without a strong bullish commitment, remaining close to the year-to-date low reached against the American currency the preceding day. Lingering concerns over geopolitical tensions arising from conflicts in the Middle East, coupled with apprehensions about decelerating economic growth in China, and speculation that the Federal Reserve may not implement as extensive interest rate cuts as initially expected, contribute to subdued investor sentiment. These factors compound with the Bank of Japan's recent shift towards a more hawkish stance earlier this month, providing some support for the JPY as a safe-haven currency.

Gold prices extended a range-bound consolidation in the Asian session, hovering around $2,015, as investors scaled back expectations for aggressive policy easing by the Federal Reserve. Meanwhile, EUR/USD remained near 1.0750, facing downward pressure after weaker Europe's Producer Price Index data on Monday. The EU contemplates a disinflationary trend, potentially prompting the European Central Bank to consider easing its policy. The Organisation for Economic Co-operation and Development (OECD) projects inflation in Europe to remain above the ECB's 2% target until after 2025.

Investors are closely monitoring Federal Reserve officials' speeches for insights into potential monetary policy adjustments. Additionally, the release of December's Eurozone Retail Sales data on Tuesday is anticipated to provide further information on economic conditions within the Eurozone.