Fed rate cut hopes slammed by surprise inflation rebound, 'no landing' fears ignite

January's inflation report knocked stocks lower and sent yields soaring as it slashed odds of a rate cut this year. Even though Fed funds futures have since settled a bit, odds of a first move in March are now just 1-in-10.

The chances of a rate hike this year are also rising, with almost one-in-five Bank of America poll respondents seeing "no landing" as the central scenario over the next 12 months. This all comes ahead of key GDP readings and a heavy earnings calendar.

The U.S. January consumer price index (CPI) report took markets by surprise Tuesday, knocking yields and the dollar higher and stocks sharply lower. The report showed annual inflation slowed to 3.1% from 3.4% - but core inflation was stickier at 3.9%, with rents and services costs still elevated.

And this sparked renewed fears the Fed may struggle to cut rates at all this year - so-called 'no landing' fears. Fed funds futures trimmed odds of a rate cut, although have since settled a bit. Odds of a first move in March are now just 1-in-10, and it's 50-50 for May. A quarter-point cut is not fully priced until the Fed's June 12 meeting.

This comes despite persistently strong labor market data, although GDP forecasts have been ratcheted down. The ISM services PMI for January, due later today, will provide another health check on the U.S. economy.

There's also a heavy earnings calendar, with Cisco Systems, Kraft Heinz, Westinghouse, Global Payments, Tripadvisor, Equinix, Ventas, Albemarle, CME, IQVIA, Arch Capital, Occidental Petroleum, American Water Works, Tyler Technologies, Rollins, CF Industries, Williams, Charles River Laboratories, Martin Marietta Materials, Generac all due to report.

In foreign exchange, the dollar fell back from 2024 highs hit Tuesday, but remained resilient. The dollar index fell 0.2% to 101.96, but this was still not far from Tuesday's high of 102.099 - a level not seen since last May.

Against Japan's yen, the dollar fell back to 150.57, after hitting a three-month high of 151.19 early Tuesday. Officials spoke Wednesday and said they were watching the market closely.

"Rapid moves are undesirable for the economy," Japan's Finance Minister Shunichi Suzuki told reporters. "We are watching the market even more closely." Japan's top currency diplomat Masato Kanda said the nation would take appropriate action on forex if needed.

In terms of the calendar, the ISM services PMI for January is due at 1500 GMT, followed by the final Markit services PMI for January at 1600 GMT. Bank of England Governor Andrew Bailey will also testify in parliament.

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