Several Asian equity markets are closed for the lunar new year holiday this morning but those that are open are mostly up on the day. The oil price is showing signs of levelling off after a rise over the past couple of weeks that has taken it to an early year high. The move seems to partly reflect hopes that China’s removal of Covid restrictions will boost demand.
Just released UK public finance data for December showed net borrowing at £26.6bn, which is more than double its level at the same point a year ago. However, the full year deficit may still undershoot forecasts. Next month’s figures which will include self-assessment tax revenues will be important in determining whether that could prove to be the case. Meanwhile, the fall in gas prices in early 2023 is boosting hopes that the cost of the energy price subsidy in the 2023/24 budget will be less than originally estimated.
The rest of today’s calendar is dominated by PMI updates. In the UK, both the manufacturing and services headline indices stayed below the key 50 level that signals a contraction in activity in December, although for services that was only marginal. For January, we expect small falls in both indices signalling a likely continued drop in manufacturing output and at best very modest growth in services. Also to be watched for closely are further signs data of an easing in inflationary pressure and supply chain bottlenecks. The CBI industrial survey will later provide an alternative reading on industrial trends.
The manufacturing and services PMIs for the Eurozone were both below 50 in December. However, the services index was only just so and we expect a rise in January to take it back above the key 50 level. That seems consistent with European Central Bank President Lagarde’s comments that the economic environment looks a touch less negative. In contrast the manufacturing reading is forecast to stay well into contractionary territory. Nevertheless, overall, the data is forecast to be consistent with the possibility that the Eurozone may still dodge a technical recession.
The US PMI indices are also expected to post another set of sub-50 readings. Typically, these tend to be less closely watched than the more established ISM surveys due next week. However, markets may see the data as further confirmation that US interest rates are close to a peak.
Bank of England and US Federal Reserve policymakers have already gone into silent periods ahead of next week’s policy update. The ECB’s Lagarde will speak today but she is unlikely to change expectations that Eurozone interest rates will be raised by another 50 basis points next week.
The US dollar remained under pressure yesterday particularly against a generally stronger euro. Sterling also fell against the euro as markets weighed up interest rate expectation ahead of next week’s monetary policy updates in the UK, US and the Eurozone.
