Asian equities are mixed this morning as the Japanese market is up sharply, but others are seeing more modest rises or small falls. The move in Japan followed confirmation from the Bank of Japan that it had left its monetary policy unchanged this month. That news also led to a decline in the yen as there had seemingly been some concern in markets beforehand that the BoJ would follow up on last month’s decision to raise its target for long-dated bond with a further tightening move. Instead, the soon to leave BoJ Governor Kuroda reiterated continued support for a highly stimulatory policy position.
Just released data showed that UK annual CPI inflation (Dec) dropped to 10.5% from 10.7% in November. As expected, the fall is mostly due to a big decline in petrol prices as ‘core’ inflation was unchanged from November at 6.3%. Another fall seems likely next month as petrol and food prices continue to ease. Moreover, inflation seems set to fall sharply further in coming months and October’s inflation rate of 11.1% now looking increasingly likely to have been a peak. However, still elevated domestic inflationary pressures from a tight labour market, which could continue to exert upward pressure on services prices, will remain an area of concern for the Bank of England.
US December retail sales are forecast to have fallen sharply and industrial production is also expected to be down. Some of that weakness will probably reflect the impact of the severe storm that hit the US late in the month. Moreover, as US retail sales are not adjusted for inflation some of the decline in that area will be a price effect. However, it does seem that underlying activity is also weakening with sales of big-ticket items such as cars expected to be sharply lower.
Meanwhile, US December PPI data are likely to reveal further disinflationary pressure in the pipeline. Last week’s US CPI data for December showed that goods inflation is now falling as bottlenecks ease and prices in some areas, notably autos, are much lower than a year ago. The Federal Reserve’s Beige Book of anecdotal evidence on the economy will also provide indications on these trends. Several Fed policymakers are also set to speak.
In the Eurozone, the final reading for December CPI is expected to confirm that headline inflation fell for the second successive month. However, European Central Bank clearly seem concerned that core inflation rose to a new high and as a result they seem set to raise policy interest rates by another 50 basis points in February.
In currency markets sterling has risen this morning against the US dollar and, albeit to a lesser extent, against the euro as today’s inflation data reinforced the case for a further interest rate hike by the Bank of England. Today’s US releases will be the next key focus for markets.
