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.
