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Asian equity markets are mostly higher this morning following gains yesterday in Europe and the US. Those moves were fuelled by a lower-than-expected outturn for November US CPI inflation which further boosted hopes of an early peak in US interest rates. Attention will today be on tonight’s US Federal Reserve monetary policy update with markets looking for signs that they are about to take a more dovish tilt.
Just released UK CPI for November showed that annual headline inflation had slipped by more than expected to 10.7% from 11.1% in October. The ‘core’ rate (excluding food and energy prices) also unexpectedly declined to 6.3% from 6.5% in October. The data will boost hopes that October’s numbers represented a peak for inflation. Nevertheless, inflation is still expected to remain very elevated in the near term.
Today’s US Fed update is the first of several central bank announcements this week. All of them are expected to result in further rises in interest rates but, in the case not only of the Fed but also of tomorrow’s updates from the Bank of England and the European Central Bank, they are expected to opt for smaller rate rises than previously. For markets globally, the Fed’s announcement will probably be most crucial. It has raised rates by 75 basis points at each of its last four meetings. However, comments from Powell and subsequently from other Fed policymakers have convinced markets that Wednesday’s increase will be a smaller one of 50bp.
Nevertheless, the Fed seems likely to temper this by reaffirming the message delivered by Powell after the November policy meeting that rates are likely to peak at a higher level than previously suggested and that any rate cut is a long way off. Powell will likely stress this in his press conference, and this will probably be supported by revisions to policymakers’ economic forecasts. Expectations are centring on the possibility that the median forecast will now show rates peaking above 5% next year. It will also be interesting to see if cuts previously forecast for 2024 are now pushed further out.
Ahead of the Fed update, the data calendar is relatively light. The Office for National Statistics house price index for October will be watched for confirmation of the message from more timely indicators that UK house price inflation is slowing. Meanwhile. Eurozone industrial production is expected to have fallen by 1.5% in October.
US bond yields dropped sharply after the lower-than-expected CPI data. They later recovered from their lows but were still substantially down on the day. In contrast, UK gilt yields rose yesterday although the market may get a boost today from the lower UK inflation outturn. The US data also had a marked impact in currency markets where the US dollar fell sharply against both the euro and sterling.
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Asian equity markets opened higher following the strong finish in US trading but pared some of the gains ahead of the US CPI inflation report later today. The US dollar was little changed overall, while US 10-year Treasury yields edged a little lower overnight. Oil prices firmed, helped by the reported easing of Covid restrictions in China.
Latest UK labour market data were released earlier this morning. They showed further signs of cooling in the labour market, but overall conditions remained tight. The unemployment rate edged up to 3.7% for the three months to October, in line with our and consensus forecasts, while the number of job vacancies continued to fall but remained elevated from a historical standpoint. Nominal wage growth continued to rise, albeit at a slower pace than inflation, with total pay growth up marginally to 6.1% from 6.0%, as expected. Regular pay growth (excluding bonuses), however, rose more than forecast, also to 6.1%, which was the highest rate recorded excluding the unusual fluctuations during the pandemic period. Meanwhile, lost working days due to labour disputes were the highest for over a decade.
Staying in the UK, latest CPI inflation figures will be released early tomorrow morning ahead of the BoE policy update on Thursday. We expect headline inflation to ease only slightly to 10.9% in November from 11.1% in October. Core inflation, excluding food and energy, is forecast to be unchanged at 6.5% with services inflation remaining elevated. Inflation may now have peaked but it seems set to remain very elevated at least until the spring. The BoE Financial Stability Report this morning could also be interesting, especially considering volatility in sterling markets in the recent past.
The focus later today is the US CPI inflation figures for November. They will likely set the tone for markets ahead of tomorrow’s Fed monetary policy decision, with the inflation outlook determining how much further interest rates could still have to rise in 2023. The data are forecast to provide further evidence that inflationary pressures from global factors such as supply chains are easing. However, they could also show that domestic pressures remain a concern particularly for services inflation. Overall, we forecast headline CPI falling to 7.3% from 7.7% and core CPI edging down to 6.2% from 6.3%.
In the Eurozone, the German ZEW survey is expected to show a further improvement in economic sentiment among investors, although confidence levels remain at depressed levels. We see the current situation rising to -52 from -64.5 and the expectations component up to -25 from -36.7.
The pound rose slightly after this morning’s UK labour market report, but in essence remained in tight ranges ahead of this afternoon’s US inflation data. The 10-year gilt yield closed higher yesterday but the US 10-year Treasury yields overnight traded slightly below yesterday’s highs.
Asian equity markets are under pressure ahead of tomorrow’s US CPI inflation data and key central bank updates on Wednesday and Thursday. The negative risk tone follows a late Friday sell-off on Wall Street. Futures markets point to lower stocks at the start of trading in Europe.
The UK economy bounced back by 0.5%m/m in October, slightly above market expectations for a 0.4% rise. The increase follows September’s sharp 0.6% fall which was affected by the extra bank holiday for the late Queen’s state funeral. Health activity within services was also supported by the Covid booster campaign, while manufacturing and construction output beat expectations. Energy demand, however, fell which was possibly due to the unseasonably warm weather during the month and high prices.
Overall output in the economy is 0.4% (slightly) above February 2020 before the pandemic began to affect economic activity. Despite the positive start to the quarter, underlying activity is expected to remain weak with the economy forecast to contract for a second consecutive quarter and therefore signal a technical recession.
Early tomorrow sees the release of the latest monthly UK labour market report. The data is expected to show further signs of cooling but overall conditions remaining tight. Unfilled vacancies, for instance, remain very high but have started to fall, an indication that the demand for labour may be moderating. However, labour shortages persist as the inactivity level among the working-age population remains high relative to pre-Covid levels. We expect the unemployment rate to edge up to 3.7% for the three months to October, but underlying wage growth (excluding bonuses) is forecast to accelerate to 5.9% from 5.7%.
A busy week continues in the UK with CPI inflation figures on Wednesday and the Bank of England policy decision on Thursday. We expect the headline inflation rate to ease only slightly to 10.9% in November. The BoE, meanwhile, is expected to raise interest rates by a further 50bp to 3.5% after the 75bp rise at the last meeting.
Outside the UK this week, US CPI inflation data is the key release on Tuesday ahead of the US Federal Reserve update on Wednesday. In the Eurozone, the ECB announces policy on Thursday shortly after the BoE. Like the BoE, both the Fed and the ECB are expected to dial back the hiking pace to 50bp from 75bp in the previous meetings.
The pound was slightly firmer following this morning’s UK monthly GDP figures, but the overarching driver was broader dollar strength in response to the risk-off sentiment. GBP/USD has fallen from Friday’s highs above 1.23 and is also lower against the euro.
