Asian equities are mostly up this morning. Japan posted a smaller-than-forecast Q4 GDP rise of 0.2% following a downwardly revised decline of 0.3% in Q3. The New York Federal Reserve’s survey of consumer expectations saw the largest one-month drop in US income expectation in its 10-year history.
Just released UK labour market data showed conditions are still tight enough to provide ongoing concerns to the Bank of England that domestic inflationary pressures may not be easing enough to allow inflation to fall back to target. Employment in the three months to December rose by a larger than expected 74,000 while the unemployment rate, held at 3.7%. Moreover, while overall earnings growth slowed, regular pay growth picked up by more than expected to 6.7% suggesting that settlements are still rising.
Due to favourable base effects, we expect annual US CPI inflation to have fallen for the seven consecutive month in January. However, this month’s fall to 6.3% from 6.5% is expected to be smaller than other recent drops. Meanwhile the monthly rate is forecast to increase by 0.5% due to higher gasoline prices. It also seems that used car prices rose sharply during the month, which will push up both overall and core inflation, while elevated services inflation is also likely to continue to be an issue. Consequently, while we expect annual core CPI to ease, the monthly increase is forecast to match December’s upwardly revised 0.4%m/m rise.
Overall, the data seems set to be consistent with US Federal Reserve Chair Powell’s recent cautionary comments that the disinflationary process is likely to be bumpy. The several Fed policymakers who are due to speak today are expected to reiterate the message that US interest rates have further to rise. The rest of today’s calendar is light. Eurozone Q4 GDP is an update which is not expected to be revised from the first reading that showed a 0.1% rise. However, the report may provide some interesting new detail.
January UK CPI data out early tomorrow is expected to see a third consecutive fall in annual inflation. However, it is forecast to remain in double digits for now, in contrast to the US and the Eurozone. We project the headline rate to fall to 10.2% from 10.5% – driven in part by petrol prices – and see core CPI dropping to 6.1% from 6.3%. There is a higher degree of uncertainty over the outcomes because the inflation data will incorporate new weights. The broader picture is that inflation is on the way down but only gradually.
UK gilt yields rose again yesterday despite a modest rally in US Treasury yields that has continued overnight. The inflation data due over the next two days may have significant impacts on both markets. The US dollar slipped yesterday against both the euro and sterling.
