Asian equity markets were lower following yesterday’s stronger-than-expected US producer price inflation data and some hawkish Fed comments. Treasury yields climbed as markets reprice US policy rate expectations towards three further 25bp increases by the summer and for rates to stay higher for longer. In other news, it is reported that UK PM Sunak is in Belfast to meet local party leaders in a sign that a deal with the EU on the Northern Ireland Protocol may be close.
Earlier this morning, official UK retail sales figures for January showed an unexpected month-on-month rise of 0.5%, with the ONS reporting that sales promotions supported the increase. Nevertheless, the December outturn was revised lower to -1.2% and comparisons of the latest three months to the previous three months and to the same period a year earlier were both negative, suggesting ongoing caution in consumer behaviour.
Ahead today, the economics calendar is relatively sparse. UK attention will likely turn to next week, with key releases centring on surveys including the flash PMIs, GfK consumer confidence and CBI distributive trades report. They will all provide further insights into reported activity and confidence in February.
In the Eurozone, the ECB’s Villeroy (Bank of France Governor) will speak on monetary policy and inflation. President Lagarde reiterated earlier this week that the ECB intends to raise interest rates again in March by 50bp. Next week’s calendar includes Eurozone flash PMIs and the German Ifo business survey, both of which are expected to show further improvements, adding to expectations that recession will be avoided.
Across the pond in the US, import price inflation is due today, while the Fed’s Barkin will discuss the US labour market and Fed Governor Bowman is also scheduled to speak. The focus for next week includes January personal consumption data including the deflator (the Fed’s preferred inflation gauge) and the minutes of the Fed’s last policy meeting, although the latter may be considered dated given recent developments.
The US dollar on a trade-weighted basis has risen to its highest level since early January. EUR/USD and GBP/USD are heading closer to 1.06 and 1.19, respectively. There was limited initial reaction to this morning’s UK retail sales figures. US 2- and 10-year Treasury yields continued to climb overnight, rising to 4.68% and 3.89%, respectively, at the time of writing. The UK 10-year gilt yield edged up to 3.50% at yesterday’s close.