OVERNIGHT
Asian equity markets are mostly up his morning after US CPI data for December helped cement expectations US interest rates are close to a peak. The US inflation data were actually close to expectations but nevertheless still represented a sixth successive slowdown in annual inflation and third successive sharp downward move. Afterwards, one US Federal Reserve policymaker noted that he now favoured a smaller interest hike of 25 basis points at the upcoming February monetary policy update, down from 50bp last time. China posted a higher-than-expected trade surplus in December. Both exports and import flows fell, probably reflecting the impact of Covid restrictions.
THE DAY AHEAD
Just released data showed that UK GDP unexpectedly rose by 0.1% in November. As expected, industrial production was down but construction activity was flat and services output unexpectedly rose. The report belied indications from business surveys that economic activity fell during the month. The unexpected gain means that GDP would now have to decline by more than 0.5% in December to be consistent with forecasts of a decline in GDP in Q4 as a whole.
Already released November data for some of the individual countries in the Eurozone, notably France and Germany, suggest that today’s industrial production release for the region as a whole will show a solid rebound after October’s big decline. We forecast a monthly rise of 0.9% following the previous fall of 2.0%.
In Germany an estimate for GDP growth for 2022 as a whole will be released today and we expect annual growth of 1.7%. Data for Q4 GDP is yet to released but today’s expected outturn would be consistent with a quarterly fall and would point to a risk of Q4 decline in the Eurozone as a whole.
US measures of consumer sentiment rose in December possibly because of the growing signs that inflation is now falling back. Given the further decrease in the latest CPI inflation data released yesterday and the indications from the early January decline in petrol that it is set to fall further, we look for another rise in today’s University of Michigan consumer sentiment number for January. Also of interest will be whether the measures of inflation expectations have declined again.
Several US Fed policymakers are scheduled to speak today. Their reaction to yesterday’s inflation data will be watched closely by markets. Particularly interesting will be whether others echo the comments of Philadelphia Fed President Harker that the pace of rate hikes should slow to 25bp at the upcoming Feb policy update.
MARKETS
US bond yields fell after yesterday’s inflation update and yields in some markets, including the UK, followed in their wake. In currency markets the US dollar fell further against both the euro and sterling. This morning’s GDP data does not appear to have had a marked initial impact on sterling.
