Asian equity markets are mostly up this morning, although Chinese indices are down. The World Bank highlighted downside risks for economic growth this year as it cut its 2023 global growth forecast to 1.7% from its previous estimate of 3.4%. In comments yesterday, US Federal Reserve Chair Powell did not talk about the immediate interest rate outlook but did warn that unpopular decisions may be necessary to control inflation. Meanwhile, another Fed policymaker (Bowman) said that further monetary policy tightening was necessary.
Today’s data calendar is very quiet with nothing of real note in the Eurozone, UK or the US. Italian retail sales for November are expected to post a second consecutive monthly fall but that is unlikely to have any impact on markets. Tonight’s Japanese balance of payments report is predicted to show a rise in the current account surplus in November.
With today’s calendar so sparse, focus is inevitably turning to tomorrow’s US CPI report, which is probably the key release of the week for markets. Recent indications from a number of economies, including both the Eurozone and the US, that inflation has peaked is pushing down bond yields and market expectations for policy interest rate rises. Tomorrow’s US CPI seems certain to show further a fall in headline inflation given the recent decline in energy prices, while core goods inflation may have fallen again on signs that bottlenecks have eased. However, services inflation may go up again given that tight labour markets seem still to be fuelling domestic cost pressures.
The latter trend could still have a crucial impact on the evolution of monetary policy over the next few months. Today is light in speeches from central bank central policymakers. However, several updates are scheduled for later this week and, with the growing expectation that we may be close to a pivot point on policy, all comments will be followed particularly closely. So far, policymakers seem to be playing down the chances of an early pivot. Of crucial immediate interest is whether and by how much the Bank of England, European Central Bank and US Fed plan to raise interest rates at their upcoming policy updates in early February.
Early tomorrow Chinese CPI and PPI inflation reports for December will be released. Both measures have slowed in recent months and producer prices have fallen for two months in a row. Inflation is expected to have remained low in December, but it will be interesting to see whether it will now bounce given that Covid restrictions are being eased.
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