Asian equity markets mostly held on to gains ahead of the key US inflation data later today. In China, consumer price inflation edged up to 1.8% in December from 1.6% in line with expectations. Factory gate price inflation, however, was more negative than expected at -0.7% versus forecasts for -0.1%, which may reflect the near-term impact of rising infection rates as Covid restrictions are lifted.
There are no notable UK data releases today, but early tomorrow’s monthly GDP figures for November will be closely watched for indications of whether GDP contracted for a second consecutive quarter in Q4. Both the month-on-month fall of 0.6% in September and the subsequent 0.5% rebound in October will have been impacted by the timing of the late Queen’s funeral. The November estimate therefore will be a cleaner indicator of the underlying trend. Survey evidence and the retail sales reading suggest that activity declined, and we look for a monthly GDP fall of 0.3%. Later today, BoE MPC member Catherine Mann will deliver a lecture on challenges facing the UK economy and monetary policy. She dissented in favour of a more hawkish 75bp rise at the last meeting.
In the Eurozone, there is likely to be some attention on the ECB Consumer Expectations Survey, especially with concerns about second-round effects that could keep inflation above the 2% target over the medium term. Even though headline CPI inflation fell in December due to lower energy, core inflation (excluding food and energy) continued to accelerate. The last results for the ECB Consumer Expectations Survey showed inflation expectations one year and three years ahead at 5.4% and 3.0%, respectively, both well above the 2% target.
The most important release today is the US December CPI inflation report which seems certain to show a further fall in headline inflation following the recent decline in energy prices. We expect headline inflation to show a sixth consecutive decline to 6.6% from 7.1% in November (and a June high of 9.1%). We also expect the ‘core’ rate to have fallen to 5.8% from 6.0%, mainly reflecting a decline in goods price inflation as global bottlenecks continue to ease, although services inflation may rise again reflecting domestic pressures including from the labour market. Overall, US inflation is moving in the right direction but there needs to be more progress before the Federal Reserve even considers declaring victory. Fed speakers later today include Harker, Bullard and Barkin.
The US dollar is slightly lower overall ahead of the inflation data later today with markets anticipating further signs of easing price pressures. GBP/USD is little changed, remaining above 1.21, while EUR/USD is marginally firmer. US 10-year Treasury yields are little changed just above 3.5%. The Japanese yen is the outperformer on unconfirmed reports that the BoJ may tweak policy further (it has already allowed 10-year yields to rise further than before).
