Many Asian equity markets continue to be closed for the lunar new year but those open have seen mixed performances. The latest inflation reports in Australia and New Zealand proved to be stronger than expected, boosting expectations of further interest rate rises in both. However, in the UK the latest producer price data for November and December showed a moderation in both input and output price inflation due to lower oil prices and the easing of some global bottlenecks.
The German IFO stands out in an otherwise sparse calendar. It will be watched for further confirmation of the recent signs that Eurozone economic conditions are stabilising after yesterday’s German and Eurozone PMI reports for January pointed in that direction. The composite PMI measures in both cases rose from their levels in December. For the Eurozone as a whole, the overall index measure moved above the 50 level that signals an expansion in economic activity for the first time since last June. For Germany, the combined manufacturing and services index stayed just below 50 but services moved above 50 for the first time since June, a sign that domestic conditions are improving.
That lends support to European Central Bank President Lagarde’s comment that there are signs that economic conditions had improved since the ECB last updated monetary policy in December. Recent IFO readings also point that way. The headline index rose in both November and December, primarily because of an improvement in expectations but also with some tentative signs that current conditions are improving. Today’s January update is expected to see a further rise in both components.
Markets are expecting the Bank of Canada to raise interest rates again today but this time are looking for only a 25 basis point hike. That would be the smallest increase since the BoC’s first move in this tightening cycle, which so far has seen rates raised by 400bp. There is also a lot of speculation that this may be the last hike for now amid growing concerns about downside risks for growth. Consequently, so there the updated Monetary Policy Report and BoC Governor Macklem’s press conference will be watched for signs whether that is likely to be the case.
The Bank of Japan will release a summary of opinions of policymakers from its January policy meeting this evening. The more detailed minutes of the December meeting, when the BoJ surprised markets by raising the ceiling for bond yields, suggested that that should not be interpreted as a monetary policy tightening move. Nevertheless, today’s note will likely be watched for clues on how close the BoJ is to a hawkish policy pivot.
Bond yields in both the UK and the US fell yesterday as the outcomes of next week’s interest rate updates were eagerly awaited. Meanwhile in currency markets the US dollar remained under pressure against both the euro and sterling as it slipped to a new low for the year against the former.
