Markets
The much-anticipated US December CPI reading literally couldn’t be more spot on. Monthly headline dynamics eased as expected from 0.1% to -0.1% m/m, resulting in a deceleration of the yearly figure from 7.1% to 6.5% y/y. Energy was a main contributor to easing prices, dropping more than 9% on a monthly basis. Core inflation rose by 0.3% to be up 5.7% compared to the same month a year earlier vs 6% in October. Ongoing price drops in the market of used cars and trucks (-2.5% m/m) and airlines (-3.1% m/m) and milder price pressures in recreation and education & communication help explain the modestly lower core gauge. That said, housing continued to rise at a fast 0.7% m/m pace (8.1% y/y). The broader (wage-sensitive) services inflation advanced by 0.6% m/m (7.5% y/y). Today’s numbers follow softer-than-expected wage growth and a sharp setback in the non-manufacturing ISM last Friday. The combo all but cements market expectations for a further slowdown of the Fed tightening pace from 50 bps to the regular 25 bps. Philly Fed Harker, a voting member this year, already shortly after the release said that such a pace “will be appropriate going forward”. He sees core inflation going down to 3.5% this year. At first, markets were even disappointed that the numbers didn’t surprise to the downside, the way they did in previous months. US yields and the dollar shot up but that didn’t last two seconds. The yield curve currently turns less inverse with declines at the front of more than 10 bps before paring a few bps as US investors joined. The 2y yield is flirting with the recent (December) lows around 4.13%. Next support is located at 4%. Longer maturities decline 1.8-3.7 bps with the 10y yield temporarily dropping below the June interim high of 3.5%. German bond yields got caught in the slipstream, losing 3.9-6.6 bps with the wings slightly underperforming the belly of the curve. Gold likes the interest rate drop and went for the $1900 barrier for the first time since May last year. US equities, however, fail to profit. The US dollar gets a serious beating. The trade-weighted DXY loses critical support at 103 (2020 panic surge) and is already testing next support at 102.34 (62% retracement of the 2022 rally). EUR/USD bounced off 1.0735 support to test 1.0806 (March 2022 interim low). USD/JPY extends a JPY-driven drop seen in the Asian session. The pair is at risk of losing key support around 130 (down from 132.45 at yesterday’s close). Sterling interestingly enough is unable to really profit from the weak greenback. GBP/USD ekes out a small gain to 1.218. EUR/GBP is going nowhere just below the 0.8867/77 resistance level despite news reports that the EU and UK are preparing to enter the negotiating tunnel next week. This intense phase of talks aims to settle the remaining issues over the Northern Irish protocol (role of the European Court of Justice in case of disputes, governance of the protocol …). In other UK news, the Bank of England said it has already unwound its emergency bond portfolio, consisting of a little less than £20bn UK gilts bought end last year to stem the Truss-Kwarteng driven turmoil.
News Headlines
The ECB published the results of its consumer expectations survey of November. Inflation expectations for the next 12 months declined from 5.4% to 5.0%. Expectations for inflation 3-years ahead eased slightly to 2.9% from 3.0%. Aside from inflation, consumers expected nominal income to grow by 0.9% over the next 12 months (0.7% in October). For the first time since mid-2021, expectations for nominal spending growth decreased from 4.7% to 4.3%. Economic growth expectations for the next 12 months rose from -2.6% in October to -2.0%. Consistent with the higher expectations for economic growth, expectations for the unemployment rate edged down to 12.4%.
Headline inflation in India cooled further in December, from 5.88% in November to 5.72%, keeping it within the 2.0%-6.0% target range of the Reserve bank of India. Food price inflation, which accounts for 47% of the basket decelerated to 4.19% from 4.67%. The Reserve Bank of India last year raised its policy rate 225 bps to 6.25%. The next policy meeting is scheduled for Feb 8. As the RBI keeps a close eye at core inflation, a 25 bps final rate hike at the February meeting is still very well possible. The rupee over the previous days gained modest ground against the dollar (currently USD/INR 81.55) after holding near all-time weakest levels just below USD/INR 83 in December.
