Stocks and Bonds Waver as CPI Fails to Shift Fed Expectations

U.S. equity futures edged lower alongside mixed global markets as earnings season shifted into a higher gear and investors waited for December’s inflation report to help determine the market’s next direction. Currency markets were also active, with the Japanese yen sliding to its weakest level since 2024, underscoring ongoing uncertainty around monetary policy.

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Futures tied to the S&P 500 slipped 0.1% ahead of quarterly results from JPMorgan Chase & Co., one of the first major banks to report this earnings season. European stocks struggled to find momentum, trading in a narrow range as investors digested regional economic data and corporate updates. In Asia, equities posted stronger gains, with a key regional benchmark climbing nearly 1% after Japan’s Nikkei 225 surged on speculation that Prime Minister Sanae Takaichi may be preparing to call a national election.

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The cautious tone in U.S. markets reflects a broader wait-and-see approach among investors as they balance strong equity performance against lingering questions about inflation and interest rates. With stocks hovering near record levels, traders appear reluctant to make aggressive bets until fresh data provides greater clarity on the Federal Reserve’s policy path.

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December’s inflation report is expected to play a pivotal role in shaping near-term market sentiment. Investors are looking for confirmation that price pressures continue to ease without signaling a sharp slowdown in economic activity. A softer reading could reinforce expectations for eventual rate cuts later in the year, while any upside surprise may reignite concerns that borrowing costs will remain elevated for longer.

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Earnings season adds another layer of complexity. Financial institutions, which often set the tone for reporting periods, are under scrutiny for signs of credit stress, loan demand trends, and the impact of higher rates on profitability. JPMorgan’s results, in particular, are being closely watched for insight into consumer spending, corporate activity, and management’s outlook for the months ahead.

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Beyond the banking sector, investors are preparing for a steady flow of corporate updates across technology, industrials, and consumer-focused companies. While earnings growth expectations have moderated compared with earlier in the year, markets are still pricing in relatively resilient profit margins. That leaves little room for disappointment, increasing the risk of sharp stock-specific moves.

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Overseas, European equities struggled to gain traction as investors weighed mixed economic signals. Slowing growth in parts of the euro zone has kept pressure on cyclical stocks, while defensive sectors have offered some stability. Market participants remain focused on how central banks in the region will respond if inflation continues to cool but growth remains fragile.

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Asian markets painted a more upbeat picture, led by Japan. The Nikkei 225 rallied after reports suggested Prime Minister Sanae Takaichi could call an election, a move some investors believe may pave the way for renewed fiscal support or policy continuity. Japanese equities have already benefited from corporate governance reforms and improving shareholder returns, and political clarity could add another tailwind.

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Currency markets reflected diverging policy expectations. The yen’s decline to its weakest level since 2024 highlights the contrast between Japan’s still-accommodative stance and tighter conditions elsewhere. A softer yen tends to support Japanese exporters but also raises questions about potential intervention if the move becomes too rapid.

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In the U.S., Treasury yields were little changed as bond investors awaited inflation data, reinforcing the sense that markets are in a holding pattern. Stable yields have helped limit equity volatility, but that calm could quickly give way if economic numbers surprise in either direction.

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Looking ahead, investors are likely to remain highly data-dependent. Inflation trends, central bank commentary, and earnings guidance will all play critical roles in determining whether markets can extend recent gains or enter a period of consolidation. With valuations stretched in some areas, selectivity is becoming increasingly important.

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For now, global markets appear caught between optimism about earnings resilience and caution over macroeconomic risks. Until clearer signals emerge from inflation data and corporate results, investors may continue to favor a balanced approach, focusing on quality companies with strong cash flows and defensible business models.

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