Stock Market Soars on Cooling Inflation and Strong Bank Earnings | Daily Market Analysis

Key events:

• UK - GDP (MoM) (Nov)
• USA - Core Retail Sales (MoM) (Dec)
• USA - Initial Jobless Claims
• USA - Philadelphia Fed Manufacturing Index (Jan)
• USA - Retail Sales (MoM) (Dec)

The stock market surged higher on Wednesday, driven by cooling inflation and robust quarterly earnings from major Wall Street banks. This resurgence in investor optimism saw the Dow Jones Industrial Average climb by 703 points, or 1.7%, the S&P 500 rise by 1.8%, and the NASDAQ Composite jump by 2.5%.

Several leading banks reported impressive quarterly results, reigniting a bullish sentiment across the markets. JPMorgan Chase (NYSE: JPM) recorded a 2% increase in its stock price after announcing record annual profits, fueled by strong performance in its trading and deal-making divisions. The bank also highlighted its plans for increased share buybacks, further enhancing investor confidence. Goldman Sachs (NYSE: GS) saw its stock soar by 6% as it reported a more than doubling of its fourth-quarter profits, underpinned by a robust trading environment. Wells Fargo (NYSE: WFC) also posted better-than-expected earnings, with a near 7% rise in its stock, largely attributed to a surge in investment banking revenues.

In the currency markets, the Japanese Yen maintained its upward momentum, reaching a four-week high against the US Dollar during Thursday's Asian session. The Yen's strength was supported by increasing bets on a potential Bank of Japan rate hike. BoJ Governor Kazuo Ueda reiterated the central bank's readiness to raise rates if economic conditions continue to improve, further boosting the JPY. The anticipation of a rate hike drove yields on Japanese Government Bonds (JGBs) to multi-year highs, reflecting the market's expectations for tighter monetary policy. This development has kept the Yen in demand, as traders position themselves for potential changes in Japan’s monetary stance.

The British Pound edged lower after two days of gains, trading around 1.2220 against the USD. This decline followed lower-than-expected inflation data from the UK, which saw the annual Consumer Price Index (CPI) rise by 2.5% in December, down from November's 2.6% and below market forecasts. The core CPI, excluding food and energy, also grew at a slower pace of 3.2%, missing expectations. This unexpected drop in inflation has increased the likelihood of rate cuts by the Bank of England , weighing on the GBP as traders reassess the interest rate outlook.

The Australian Dollar retreated after a three-day winning streak against the USD, following the release of Australia's employment data. The unemployment rate rose slightly to 4.0% in December, though employment figures exceeded expectations with a significant increase of 56.3K jobs. Despite the strong employment growth, the higher unemployment rate dampened sentiment, leading to a pause in the AUD's recent gains. Market participants are now focusing on the Reserve Bank of Australia's upcoming policy decisions in light of these labor market developments.

The New Zealand Dollar held its ground above 0.5600, supported by a weaker USD in the wake of softer US CPI data. The December inflation figures aligned with expectations, prompting speculation that the Federal Reserve might ease its monetary policy later in the year. Positive trade data from China and measures by Beijing to stabilize the Yuan further buoyed the NZD. However, potential rate cuts by the Reserve Bank of New Zealand due to the country's economic challenges could limit the NZD's upside.

Looking ahead, traders are focusing on the US economic calendar, with key releases such as retail sales figures and weekly jobless claims set to provide further market direction. These reports will be closely monitored for their potential impact on the Fed's policy trajectory and overall market sentiment. This combination of cooling inflation, strong corporate earnings, and shifting central bank policies continues to shape the trading landscape, offering both opportunities and challenges for market participants.