Asian equity markets are mixed, reportedly due in part to disappointing after-hours results from some major tech companies. That is despite a broadly solid performance in European and US stocks. Yesterday, the Bank of England (BoE) and the European Central Bank (ECB) both raised interest rates by 50bp as expected. The BoE indicated that the outlook for further policy tightening was likely to be more circumspect. The ECB, meanwhile, telegraphed another 50bp in March but acknowledged that inflation risks have become ‘more balanced’ (less upside risk).
This morning’s UK and Eurozone services PMI reports for January are final readings and are expected to be unrevised from the preliminary ‘flash’ releases, although there will be new information on Italy and Spain. UK services PMI fell to 48.0 from 49.9 in December, according to the flash estimate, suggesting the downturn in activity deepened in the new year. In contrast, the Eurozone services PMI at 50.7 moved back into expansion territory for the first time in six months. Eurozone producer prices are also due and are expected to show a further moderation in the y/y rate.
BoE Chief Economist Huw Pill, who voted with the majority of the MPC yesterday for a 50bp rise in interest rates, is scheduled to speak today at around 12:15GMT. In comments earlier this morning, he said he was confident yesterday’s rate rise was necessary and appropriate.
The spotlight today is the US monthly labour market report for January. Despite anecdotal reports of job losses in the tech and other sectors, indications from the weekly initial jobless claims data suggest the broader labour market is not yet rolling over. We expect today’s report to show moderating but still solid activity, with nonfarm payrolls forecast to rise by 200k and the unemployment rate unchanged at 3.5%. The average hourly earnings data will be keenly watched after December’s downside surprise which raised hopes of a ‘goldilocks’ or soft-landing outcome. Earlier this week, the separate employment cost index showed further signs of moderation in wage growth in Q4. We expect today’s earnings growth to slow to 4.4% (year on year).
The US ISM services survey will also draw attention, especially after the surprisingly strong drop in December to 49.2. It is expected to stage a partial rebound to 50.5 which would signal a modest expansion of activity in the new year.
UK 10-year gilt yields fell to just above 3% yesterday, the lowest this year, following the BoE policy announcement. Markets are fully pricing in only one more BoE 25bp hike. In currency markets, the pound has dipped below $1.22 this morning, while the euro also weakened towards $1.09 after the ECB policy update, although it continued to outperform sterling.
