Risk sentiment remains positive

Following gains recorded on Wall Street on Friday, equities across Asia started today mostly higher on hopes that global inflationary pressures are continuing to ease. However, gains have been trimmed with stocks across the Asia-Pacific region now trading more mixed. In particular, speculation of a shift in monetary policy continues to weigh on Japanese markets ahead of the Bank of Japan’s (BoJ) next policy decision on Wednesday. Expectations that the BoJ will signal a further move away from its ultra-easy monetary policy stance have also pushed the yen to its strongest level in over seven months versus the US dollar.

It was another positive week for risk assets supported by further signs that US inflation is on the way down and that Fed interest rates may be near a peak. That resulted in further downward pressure on Treasury yields and the US dollar. US December CPI fell to 6.5% from 7.1%, a sixth consecutive decline, and the core rate (which excludes food and energy) moved down to 5.7% from 6.0%. Both outturns were in line with forecasts and support expectations of a further moderation in the pace of Fed hikes at the next policy update. Downward trends in inflation have also begun in the UK and the Eurozone. Data later in the week are expected to show a sizeable drop in inflation in the UK, albeit headline CPI is expected to remain in double-digit territory.

Today’s calendar is devoid of any major releases, partly due to US markets being closed for Martin Luther King Jr day. There are no releases of note across Europe either with the domestic focus limited to Bank of England Governor Bailey’s appearance, alongside his Financial Policy Committee (FPC) colleagues Sam Woods, Jonathan Hall and Dame Colette Bowe, before a Parliamentary Treasury Committee to testify on the BoE’s December Financial Stability Report. A key topic of discussion is likely to be the potential financial stability implications from the elevated cost of living and higher borrowing costs.

Early tomorrow morning, the latest UK labour market update is expected to show further signs that labour demand is softening, consistent with our Sector Tracker and Business Barometer reports, but it may take longer for the full impact on pay growth to appear. We expect a marginal uptick in the unemployment rate to 3.8% in the three months to November and a fall in employment of 50k compared with the previous three months. Average earnings growth is expected to remain at 6.1% for the headline measure and rise to 6.3% for the regular pay measure excluding bonuses.

Ahead of that, Q4 China GDP data are forecast to show a slowdown in the year-on-year rate of growth to 1.6% from 3.9% in Q3 due to ongoing restrictions during most of the quarter and the rise in infection rates in December after restrictions were relaxed.