Equities are mostly trading higher across the Asia-Pacific region buoyed by expectations that US interest rates may not have much further to rise, following last week’s reports of a contraction in the US services ISM and a slower pace of payroll hiring in December. Sentiment has also been boosted by the further reopening of China’s borders over the weekend by lifting quarantine rules for inbound travellers.
The extent to which major central banks will push up interest rates further – following sharp increases last year – remains a key consideration for markets in the early stages of 2023. Signs that inflation may have peaked across a number of developed economies around the turn of the year have fuelled expectations that interest rates may also reach a peak soon, with markets pricing in highs around mid-year. Nevertheless, with significant increases in policy rates still expected – particularly in the UK and Eurozone – incoming data releases will play a key part in how much of this expectation gets realised, especially with recession fears continuing to linger.
Ahead of more important economic data – in the shape of US CPI and UK GDP – later on this week, today’s economic data slate is relatively light on key releases. The Eurozone unemployment rate is expected to have stayed at 6.5% in November, while the Eurozone Semtex investor confidence report for January is forecast to show an improvement (consensus: -18 vs -21 in December), reflective of the positive start made by equities so far this year.
Domestically, no data releases are due today although the Bank of England’s Chief Economist, Huw Pill, is scheduled to speak on ‘The UK Economic and Monetary Policy Outlook’ at an even hosted by the Money Market Association of New York University. Speaking ahead of the December meeting, at which Mr Pill voted with the majority to increase Bank Rate by a further 50bp, he said that the Bank was “acting to pre-empt the danger that inflation in a persistent way departs from target”. With inflation still in the doubt digits, markets are factoring in a strong likelihood of another 50bp increase at the February MPC meeting.
In the US, following last week’s mixed US labour market report, markets will be watching comments from Federal Reserve officials, Bostic and Daly, this afternoon. However, with both not voting members of the FOMC this year, their comments may attract limited market reaction.
Overnight, the British Retail Consortium (BRC) will release its December retail trade report, which will give an insight into how the sector fared across the typically busy Christmas period.
The US dollar has fallen further overnight, adding to the decline seen on Friday post the December US payrolls and services ISM reports. US 2-yr Treasury yields are marginally higher but still remain over 20bp lower relative to levels that prevailed prior to the release of those reports on Friday.
