Asian equities are mixed this morning with Chinese indices higher but most other markets lower. Friday reports of revisions to past US CPI inflation data and a higher-than-expected reading on consumer inflation expectations have raised concerns that US interest rates may rise by more than previously expected. This is seen as having potentially knock-on effects for interest rates elsewhere. In the UK, media reports suggest that the government is planning a security review following the incursion of Chinese balloons into Western airspace.
The impact of the recent very strong US jobs report continues to linger in financial markets. The data led Federal Reserve Chair Powell and other Fed policymakers to again highlight the probable need to raise interest rates further and to keep them higher for longer. This time global markets paid more attention and, as a result, risk sentiment turned more negative. The coming week will again see the focus on the chances of an early pivot in monetary policy.
This week’s data calendar is busy, particular in the UK and the UK where key releases include the latest inflation updates. However, today is very light. New forecasts from the European Commission are likely to follow the trend seen in other recent forecast updates with growth expectations being revised up and inflation down. Nevertheless, the Commission is likely to still warn that the level of uncertainty is high and the global economy faces a bumpy ride this year.
Overnight the Japanese Government is expected to confirm to the Diet that Kazuo Ueda is the nominee to be new Bank of Japan Governor. That news came as a surprise to markets on Friday and initially led to a jump in the yen on concerns that that it may signal a move to a tighter monetary policy. The yen subsequently settled down after Ueda said he did no,t plan an immediate change in policy but markets will be looking for further details on his views. Japanese GDP for Q4 will also be released and is expected to show a rebound from Q3’s decline.
The latest UK labour market data out early tomorrow will be watched for signs of cooling. Unfilled job vacancies are falling but for now remain uncomfortably high. Moreover, we expect the latest release to show a further fall in the unemployment rate and another rise in employment. Also, while total pay growth may have slowed modestly, we project regular (ex-bonus) pay to have picked up further to 6.6%. In all, we expect it to do little to relieve Bank of England policymakers’ concerns about domestic inflationary pressures.
Bond yields posted sharp rises across a number of markets on Friday as concerns grew that inflation may take longer than previously expected to fall back to target levels. UK and US 10-year yields have now risen by about 40 basis points from their recent lows. In currency markets, ‘risk off’ has helped push the US dollar up versus both sterling and the euro.
