Asian equity markets are mostly down this morning as nervousness grows ahead of key monetary policy updates in the US, UK, and Eurozone. In China, better than expected PMI data for January supported expectations that a loosening of Covid restrictions is lifting economic growth. In particular, the non-manufacturing index rose to its highest level since last June. In just released economic forecast updates, the IMF upgraded its 2023 global growth forecast but cut its estimate for the UK. It expects the UK to be the only major economy to see a fall in output this year and predicts only a moderate improvement in 2024.
Data on UK money supply and personal lending will provide further insight on housing market activity. Mortgage applications have slipped sharply in recent months and in November were at their lowest level since just after the first 2020 lockdown. We expect the December data to show another sharp drop. Also of interest will be December consumer credit as the recent rise in this series potentially indicates that some households are increasingly relying on borrowing to tied them through the cost-of-living crisis.
Yesterday’s Q4 German GDP data, which posted an expected fall of 0.2%, has raised the odds that output in the Eurozone as a whole also declined. The drop was partially by a rise of 0.1% in French GDP. Nevertheless, we have revised down our forecast for Eurozone GDP to show a 0.1% fall compared with a previous estimate of unchanged activity.
Meanwhile, today’s German CPI release for January has been postponed. Following a higher-than-expected outturn for Spanish CPI inflation today’s German figures were expected to further shape expectations for tomorrow’s Eurozone numbers. Those seem set to show a fall in headline inflation but remain sufficiently high that they will do little to alleviate European Central Bank concerns about inflation risks.
The US employment costs index, which Federal Reserve policymakers regard as one of the most reliable indicators of labour market cost pressures, will provide invaluable information on domestic inflationary pressures ahead of tomorrow’s US monetary policy announcement. We expect it to show a rise of 1.2% – the same as Q3. The Fed would probably regard that as too high to be consistent with meeting its inflation target. Even a much lower number is unlikely to prevent the Fed from raising interest rates tomorrow, but it may further boost market hopes that rates are very close to a peak.
Bond yields rose yesterday in both the UK and the US reflecting uncertainty over how much support this week’s policy updates will give to hopes that interest rates are close to a peak. In currency markets. the more ‘risk-off’ investor environment helped the US dollar edge up against sterling and the euro.
