Asian equity markets are mostly up this morning. That follows a sizeable rise in US equities fuelled by weaker than expected US wage data, which boosted hopes of a more dovish tilt in monetary policy at today’s Federal Reserve policy update. In China, the unofficial Caixin manufacturing PMI rose in January but stayed below the key 50 level signalling contraction. The UK faces its biggest day of strike action of the winter so far with many schools set to close in addition to severe disruption to rail services and to other parts of the public sector.
The US Fed Reserve is expected to raise interest rates again tonight with its eighth successive hike. However, markets also expect a second successive slowdown in the pace of increases, with rates this time going up by 25 basis point (to a new upper band of 4.75%) as opposed to 50bp in December and 75bp at the four previous meetings.
If there is a surprise in tonight’s update it will most likely be in the guidance on further actions. This is not one of the meetings where forecasts, including the ‘dot plot’ of interest rate projections are updated. So any new information will come from the press statement and from Fed Chair Powell’s press conference. With inflation now slowing Fed policymakers may be thinking about calling a halt to rate hikes. But they will be wary of adding to the already bullish mood of markets. So for now, Powell may still emphasise concerns about inflation and to reiterate caution about market expectations that rates will be cut this year.
The January Eurozone CPI report is expected to show a second consecutive fall in headline inflation. The postponement of yesterday’s German release means there are less data clues than usual at this stage. However, rises in inflation in France and Spain suggest that the fall in the region as a whole may be modest. We look for a decline to 9.0% from 9.2% in December with the core rate down more modestly to 5.1% from 5.2%. That is unlikely to be enough of a slowdown to have any impact on this week’s European Central Bank’s policy deliberations.
January manufacturing PMI data for the UK and the Eurozone are mostly second readings. The first set of updates showed both headline indices up from their December levels but still well below the 50-expansion level.
For the US, the January ISM manufacturing index will be new. In December it fell again and was below 50 for the third month in a row. Reports of continued weak orders suggest that the January reading will also be below 50.
US bond yields fell sharply yesterday after weaker than expected US labour cost data, while UK bond yields saw more modest declines. In currency markets, the US dollar came under some downward pressure versus the euro and sterling as markets anticipated a more dovish Fed message. The market moves, however, were relatively modest.
