Asian equity markets bounced back, broadly erasing the week’s earlier losses, after a stronger close on Wall Street with the S&P 500 index gaining for the first time in over a week. Swings in investor sentiment continue to be driven to a large degree by concerns about the global economic outlook and hopes that inflationary pressures will start to ease. Overnight, Chinese data revealed annual produce price inflation unchanged but negative at -1.3% and consumer price inflation falling to 1.6% from 2.1%.
The Bank of England/Ipsos Mori household inflation attitudes survey will be released this morning. It will be watched by policymakers ahead of next week’s monetary policy update to assess whether inflation expectations remain anchored to the 2% target. Inflation expectations among businesses in the BoE’s separate DMP survey are still elevated but have fallen back from their recent peak, so it will be interesting to see if this is also reflected among households. The latest Q3 reading of the BoE/Ipsos Mori survey showed a further pickup in one-year-ahead inflation expectations to 4.9% but falls in longer-term expectations.
In the afternoon, the spotlight will turn to US producer price inflation data and the University of Michigan consumer sentiment survey. The PPI data come ahead of next week’s CPI inflation update. Fed policymakers will be looking for further evidence of moderation in goods price inflation as well as indications on how services price inflation is evolving which is critical for the overall inflation path in 2023. We expect headline PPI for final demand to fall to 7.2% (from 8.0%) and the core measure excluding food and energy to fall to 5.8% (from 6.7%).
The preliminary December results of the University of Michigan survey will also garner interest. We look for little change in the headline sentiment index at 56.9 (vs 56.8 last month), a level which suggests caution among consumers facing high inflation and interest rates. The survey’s inflation expectations indicators will also be especially interesting and have remained high. Long-term inflation expectations (5-10 years ahead) have risen in the past two months to recent highs.
Treasury yields fell in overnight Asian markets ahead of today’s US producer price inflation data. The benchmark 10 year Treasury yield edged down to 3.46%, while the recovery in risk sentiment helped to weaken the US dollar. The pound moved up above $1.2250 but was marginally lower against the euro. Prices of both oil and gold rose.
