Tech Weakness Leads Indices Lower

STOCK INDEX FUTURES

Stock index futures are sharply lower due to mounting concerns over the U.S.’s dominance in AI, which weighted heavily on market sentiment.

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The December Chicago Federal Reserve national activity index was 0.15, which compares to the revised previous month’s figure of -0.01.

The 9:00 December new home sales report is anticipated to show a total of 672,000.

The January Dallas Federal Reserve manufacturing survey will be released at 9:30. The December figure was 3.4.

In the longer term outlook, the bullish influence of prospects of a strengthening U.S. economy will more than offset the bearish influence of the Federal Reserve’s reluctance to ease credit conditions.

CURRENCY FUTURES

The U.S. dollar index was pressured by investors pulling out from capital markets in light of reduced optimism concerning U.S. AI demand.  In addition, the reversal of U.S. tariff threats limited the outlook for imbalanced capital flows in major U.S. trading partners.

While current price volatility in the financial markets is due to the uncertainties of tariff issues, the influence of interest rate differential expectations is taking a back seat for now.

Political markets are always the most difficult to trade.

The Ifo Business Climate indicator for Germany edged up to 85.1 in January 2025 from 84.7 in December and was above predictions of 84.7. The current conditions gauge improved to 86.1 from 85.1, which was above forecasts of 85.4, while the sub-index for business expectations edged lower to 84.2 from 84.4, matching estimates.

The European Central Bank is widely expected to implement another 25 basis point reduction to its key deposit rate on Thursday following four cuts in 2024.

The Japanese yen strengthened, extending gains from the previous two weeks after hawkish signals from the Bank of Japan. On Friday, the BOJ hiked interest rates by 25 basis points to 0.5%, marking the highest short-term borrowing costs in 16 years. The central bank also hinted at the possibility of further rate increases.

The Bank of Canada is expected to cut interest rates by 25 basis points to 3.0% on Wednesday.

INTEREST RATE MARKET FUTURES

Futures are higher due to flight to safety buying, as a tech stock sell-off was fueled by concerns over the U.S.’s dominance in AI.

The U.S. Treasury will auction two and five-year notes.

There is a 97% probability that the Federal Open Market Committee will keep its fed funds rate unchanged at 4.25% – 4.50% at its January 29 policy meeting, and there is a 3% chance of a 25 basis point reduction.

Financial futures markets suggest the FOMC will lower its fed funds rate by 25 basis points at is May 7 policy meeting. Last week financial futures markets predicted the Fed would lower its key rate again at the June 18 policy meeting.

 

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