OVERNIGHT
Asian equity markets are all down this morning as uncertainty about the inflation and interest rate outlook continues to fuel volatility in market performance. Several US Federal Reserve policymakers again warned that interest rates are likely to rise further. In Australia, central bank governor Lowe said he had no intention of pushing the economy into recession.
Just released UK inflation data for January surprised on the downside. Annual CPI inflation fell by more than expected to 10.1% from 10.5% in December. That is the third successive monthly slowdown from a peak of 11.1% in October. The core rate (excluding food and energy) also slowed to 5.8% from 6.3%. Inflation is forecast to fall sharply further this year, but it seems unlikely to drop back to the Bank of England’s 2% target until the second half of 2024.
THE DAY AHEAD
The rest of today’s European data calendar is fairly light. In the UK, the ONS measure of house prices for December will be watched for confirmation of the indications from other measures that price rises are slowing in response to the rise in mortgage rates and other pressures on buyers. Eurozone industrial production is forecast to have fallen by 0.7% in December. Performance across individual countries in the region was quite varied. Both France and Italy recorded big monthly rises. However, a sharp fall in Germany and a 8.5% decline in Ireland points to an overall decline.
In the US, January retail sales are likely to command most attention. They are expected to have posted a big monthly gain and we look for a 1.5% increase with a risk of an even bigger rise. Reports suggest that car sales were particularly strong and other sales are also forecast to have picked up after a sharp decrease in December. Some of these expected gains reflect January’s unusually mild weather just as the December drop was partly due to severe pre-Christmas storm. That makes the underlying trend hard to gauge.
The January outturn for US industrial production may also be impacted by the mild weather which likely boosted manufacturing activity but means that seasonal demand for some utilities will probably have been weaker than usual. The New York Fed’s industrial survey and the NAHB housing index will provide more up-to-date readings for February.
MARKETS
UK gilt and US Treasury yields both rose yesterday after data suggested that the recent improvement in US Inflation may be close to stalling. The US dollar rose against both the euro and sterling on expectations of further US rate hikes. Sterling fell further this morning after the UK inflation drop boosted hopes the BoE may not raise interest rates again in March.
