Asian equity markets mostly firmed ahead of the weekend and next week’s lunar new year holiday. Markets had ended lower in the US and Europe yesterday. The US Federal Reserve’s Brainard, usually considered to be a dovish rate-setter, said policy will need to be restrictive for some time to get inflation down. Meanwhile, European Central Bank President Lagarde said inflation remains “way too high”. Data from Japan revealed a rise in core CPI (excluding fresh food) to 4.0% in line with forecasts but maintaining speculation about future Bank of Japan policy changes.
UK data released earlier today were more downbeat than expected. January GfK consumer confidence unexpectedly fell back to -45 from -42 in December, although still above September’s all-time low of -49. The gauge of personal finances for the next twelve months improved, but other components such as the climate for major purchases fell. Also disappointing expectations were official December retail sales which declined for a second month in a row. Headline retail sales were down 1.0%, driven by significantly lower non-food sales while grocery sales were down slightly. The ONS said consumers were cutting back due to increased prices and affordability concerns.
In the Eurozone, German producer price inflation fell for a third consecutive month to 21.6% in December from 28.2% in November. The ECB’s Lagarde speaks in Davos later today and, as noted above, continues to express concern that inflation is still too high. That supports the view that ECB is likely to raise interest rates by 50bp at the next meeting in early February, which would bring interest rates (the deposit rate) up to 2.5%. There are unconfirmed reports that the ECB may consider smaller hikes after the next meeting, but more hawkish rate-setters will be seeking another 50bp hike.
US existing home sales data are expected to show another decline as higher interest rates take effect. That would be the eleventh straight fall. Ahead of next week’s blackout period, the Fed’s Harker and Waller are both scheduled to speak today. Harker has recently indicated that he favours a smaller 25bp rate rise at the next meeting.
The pound weakened following the downbeat consumer data this morning. GBP/USD declined from an overnight high of just below 1.24 overnight towards 1.2350, although some of the fall has since been reversed. EUR/USD fluctuated around the 1.08 level. UK 10-year gilt yields closed lower at 3.28%, while US 10-year Treasury yields edged above 3.4% overnight.
