Risk appetite was positive during the Asian trading session as investors digested the latest economic data and their implications for the balance of risks for inflation and growth. Yesterday’s US retail sales figures pointed to a strong start to the year for consumer spending, helped by the mild weather. In the UK, CPI fell by more than expected which likely provides Bank of England (BoE) rate-setters more flexibility at the next policy update in March, although there will be a lot more data due between now and then, including another CPI report.
There are no major economic data releases for the UK or the Eurozone today, but there will be plenty of central bank speakers, which could provide fresh insights into the policy landscape ahead. BoE Chief Economist Pill speaks later today. He recently indicated that the next policy move is more likely to be another hike rather than a cut or a hold. Markets attach a high probability of (but are not fully priced for) a 25bp rise next month. The ECB, meanwhile, has said explicitly that it ‘intends’ to raise rates again by 50bp in March, a position which was repeated yesterday by President Lagarde. ECB speakers today include Chief Economist Lane, Executive Board member Panetta and Bundesbank President Nagel. Earlier this week, the European Commission raised its Eurozone growth forecast for this year to 0.9% and lowered its inflation forecast to 5.6%.
In the US, the most important data this week have arguably been released already. Nevertheless, today’s reports will still generate interest and include producer price inflation, housing data, weekly jobless claims and the Philadelphia Fed manufacturing survey. PPI inflation is expected to fall to 5.4% in the year-on-year comparison, while initial jobless claims are expected to remain low, suggesting limited redundancies. Housing starts, however, are forecast to fall again, with the sector affected by rising interest rates, while the Philly Fed index is predicted to improve but remain negative. Fed speakers include Mester and Bullard who will discuss the economic outlook.
Early tomorrow, we forecast official data on the volume of UK retail sales in January to fall by 0.7% (month on month), reflecting ongoing caution among consumers who are facing a squeeze on their real incomes due to higher prices. Consumer confidence remains near all-time lows, although there are tentative signs in the survey that feelings about future personal finances have started to improve. As the chart below shows, rising prices mean that consumers are having to spend more to buy less in real terms.
GBP/USD touched below 1.20 yesterday following a combination of weaker-than-expected UK CPI inflation and strong US retail sales. It has recovered slightly overnight in Asia. UK 10-year gilt yields fell yesterday, in contrast to their US and German counterparts.
