Asian equity markets moved sharply higher, catching up with increases in the US and Europe after yesterday’s softer-than-expected US CPI inflation figures. Headline CPI fell to 7.7% in October from 8.2%, while the core rate (excluding the volatile food and energy components) declined to 6.3% from 6.6%. The outturn added to expectations that the pace of tightening will slow from next month and that the terminal rate might also be lower than previously anticipated. Fed policymakers cautiously welcomed the inflation data but reaffirmed that further rate rises were likely.
Official data released this morning confirmed the UK economy contracted in Q3, in contrast to the US and the Eurozone where growth rates were positive. The fall, nevertheless, was smaller than expected at -0.2%q/q compared with expectations for a -0.5% decline. That partly reflected a stronger start to the quarter (in July) than previously estimated, but it also meant a loss of momentum through the quarter which seems not to bode well for Q4. The latest monthly GDP data for September revealed a 0.6%m/m drop with the ONS saying that at least half was accounted by the loss of a working day for the Queen’s state funeral.
The University of Michigan’s US consumer sentiment survey for November is the main economic release later today. The headline index rose to a six-month high in October to 59.9, with recent improvements supported by the strong labour market. Lower gasoline prices had also supported confidence, but they have started to rise and may explain the pickup in the survey’s inflation expectations last month (see chart). For the headline consumer sentiment index, we have pencilled in a small fall to 59.5 in line with the market consensus forecast.
Central bank speakers include the external BoE MPC member Silvana Tenreyro who appears at the Society of Professional Economists Annual Conference. She dissented from the majority decision at the November policy meeting to raise interest rates by 75bp to 3% and voted instead for only a 25bp rise to 2.5%. ECB speakers include Vice-President Luis de Guindos, Chief Economist Philip Lane and Executive Board member Fabio Panetta.
Treasury yields and the dollar fell significantly in response to the US inflation report. The 10-year Treasury yield dropped by nearly 30bp to around 2.80%, while the equivalent 10-year gilt yield fell 17bp to 3.29% at yesterday’s close. The pound gapped up above $1.17 and was also higher against the euro before paring some of its gains during the Asian trading session.
