US equity markets wavered after minutes from the December Federal Reserve monetary policy meeting warned that policymakers need to see “substantially more evidence” of easing inflation. The minutes suggest that interest rates have further to rise. Asian equities, nevertheless, were higher overnight led by tech stocks reflecting optimism about economic reopening in China. However, in the near term, rising infections may adversely impact on economic activity. China’s Caixin services PMI remained in contraction territory at 48.0, although it improved from 46.7 in November.
Domestically the final reading of the UK December services PMI and the latest Bank of England’s latest Decision Maker Panel (DMP) survey of businesses will likely draw the most attention today. The preliminary ‘flash’ services PMI was somewhat better than predicted, rising back up to 50.0 ‘no change’ level from 48.8 in November. That indicated stagnant services activity in December after contractions in the prior two months. The manufacturing PMI survey, however, continued to signal contraction in December.
Separately, the results of the BoE’s latest DMP survey will be watched, particularly for what they reveal about firms’ inflation expectations. Policymakers have previously indicated that they take note of the data to assess risks to the inflation outlook.
In the Eurozone, November producer price output data for the bloc and preliminary Italian CPI inflation figures for December will be released this morning. Preliminary December CPI data already released for Germany, France and Spain have all surprised on the downside. They suggest that tomorrow’s Eurozone flash CPI estimate may fall to close to 9%, below the consensus forecast, from 10.1% in November. ECB policymakers, however, will likely remain concerned that core inflation, excluding food and energy, is continuing to accelerate.
In the US, the monthly ADP and weekly jobless claims reports will provide further insights into the state of the labour market. The ADP may offer hints for tomorrow’s official monthly payrolls report, although it has underestimated the official data in recent months. The consensus is for ADP private sector payrolls to have increased by 150k in December. Weekly initial jobless claims are still near recent and overall, the indications are that the labour market remains resilient. In addition, we expect the latest complete set of US trade figures to show a marked narrowing of the deficit to around $61.3bn in November from $78.2bn in October. That narrowing reflects a particularly sharp fall in goods imports on the month.
The pound weakened against the US dollar overnight at just above 1.20 and is also softer against the euro. UK gilt yields closed lower but US Treasury yields rose after hawkish-sounding Fed minutes. Tomorrow’s US official labour market data will be the most important near term release.
