Asian equity performance is mixed this morning as markets remain unsure about how much weight to give to the risk of a recession. The lifting of Chinese Covid restrictions and the likelihood of a consequent pickup in trade flows is seen as a positive factor but that is offset by other developments. In the US, former Federal Reserve policymaker warned about the danger of a recession induced by tight monetary policy.
In the UK, November data for money supply and bank lending may provide further indications of the impact of higher interest rates on the economy. The numbers for mortgage applications may be of most interest. Those slipped to their lowest level since early 2020 in November and are expected to have fallen further in December.
Today’s December PMI services data for the Eurozone are mostly second readings that are not expected to be revised. The initial headline number for the region as a whole picked up to 49.1 from 48.8 in November. That was the highest reading since August but crucially stayed below the key 50 expansion/contraction level for the fifth successive month. Today’s report will contain first estimates for some of the individual economies in the region including Italy and Spain.
The US ISM manufacturing data for December is a new estimate. Yesterday’s update for the December PMI measure confirmed the initial reading of a second successive outturn below the 50. While it does not always move in the same direction, that news was nevertheless seen as confirming the likelihood that the ISM index will also post a second successive outturn below 50. Also in the US, the November JOLTS survey will provide further detail on movements in the labour market.
The minutes of the US Federal Reserve’s December monetary policy meeting will be released this evening. The December update seemed to be generally viewed by markets as more hawkish than expected on the interest rate outlook. In particular, Fed Chair Powell warned against expectations that interest rates may be cut later this year. Markets will be looking for more detail from the minutes particularly as the holiday period has meant that so far there has been less follow-up comment than usual from Fed policymakers.
Lower than expected German inflation data for December yesterday boosted market expectations that Eurozone inflation has peaked. The resulting fall in Eurozone interest rate expectations helped lift the US dollar against the euro yesterday but the rally has shown signs of running out of steam this morning. Sterling also slipped against the dollar yesterday but moved up versus the euro. Bond market yields fell in both the UK and the US yesterday as interest rate prospects in the new year were weighed up. An initial further rise in policy interest rates is generally expected but there is more uncertainty about the likely trend in rates as the year progresses.
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