Brief relief for markets after tame US inflation

A look at the day ahead in European and global markets from Ankur Banerjee

Global stocks and non-dollar currencies found some respite from their inflation-related anxieties, buoyed by a strong start to the earnings season and a softish U.S. core inflation reading that revived hopes for Fed rate cuts this year.

But the relief rally may be short-lived, with U.S. inflation still looking a bit too warm for comfort - and potentially facing upward pressure if the incoming Trump administration pursues aggressive policies on tariffs and taxes.

Cartier-owner Richemont's sales report on Thursday will be the main event during European hours, giving the first insight into the health of high-end demand as luxury firms pin their hopes on U.S. consumers, while weakness persists in China.

Investors will also keep a wary eye on developments in the Middle East after Israel intensified strikes on Gaza hours after a ceasefire and hostage release deal was announced to end fighting that began 15 months ago.

While the just-about-soft U.S. core inflation figure for December lifted sentiment, dragging Treasury yields lower and boosting stocks, analysts cautioned that the annual rate of 3.2% was still a bit on the high side, with the Fed likely to stay on hold for a while longer.

Also boosting sentiment were strong earnings from U.S. banks Goldman Sachs, JPMorgan Chase, Wells Fargo and Citigroup. Wall Street CEOs voiced confidence that the incoming U.S. administration would be business-friendly and good for banks.

Bank of America and Morgan Stanley will report results on Thursday.

European chipmakers may also take cues from an earnings report by Taiwan Semiconductor Manufacturing Co, which showed profits broadly met estimates. TSMC, whose customers include Apple and Nvidia, is closely watched for indications of AI-related chip demand.

The yen was the biggest mover in the currency market on Thursday, surging to a one-month high in Asian hours following comments by Bank of Japan Governor Kazuo Ueda that encouraged market bets on a rate hike next week.

An overwhelming majority of economists surveyed by Reuters expect the BOJ to raise interest rates at one of the two meetings this quarter, with most leaning towards a January move.

A BOJ hike would be contingent on markets staying calm when Donald Trump returns to the White House next Monday. His inauguration speech will be a focus for politicians and policymakers across the world to gauge his likely policy steps.

Analysts expect Trump's actions to boost growth but add to inflationary pressures, keeping the dollar well-supported. So much so, in fact, that the dollar index has risen 5% in the two months since the U.S. election on expectations that the Fed will keep rates higher for longer.

Scott Bessent, Trump's choice to head the Treasury Department, vowed to ensure that the dollar remains the world's reserve currency as he laid out a vision for a "new economic golden age" in prepared testimony for the U.S. Senate Finance Committee.

Elsewhere, South Korea's central bank unexpectedly left its policy interest rate unchanged and signalled it needs to wait for the domestic political turmoil weighing on the currency to stabilise before it can make further rate cuts.

Key developments that could influence markets on Thursday:

- Germany inflation data for Dec

- UK GDP estimate for Nov

- Euro zone trade balance for Nov

(By Ankur Banerjee; Editing by Edmund Klamann)