In focus today
This morning at 8:00 CET, UK inflation data for January is expected to rise in y/y terms across the headline, core and services measure. However, focus will be on the monthly seasonally adjusted developments.
In the euro area, industrial production figures for December will most likely come in lower due to the significant drop in German production.
Moreover, Japanese national accounts for Q4 are released overnight. Data have been mixed and we are looking for a modest pick-up in GDP growth following the 0.5% dip in Q3, supported by solid foreign demand. Consumption data on the other hand has been to the weak side.
Economic and market news
In the US, January CPI surprised to the upside, with core inflation at 0.39% m/m (consensus 0.3% m/m) while headline inflation was up 0.3% m/m (consensus 0.2% m/m). The surprise was fuelled by a broad-based increase in services prices, indicating that underlying momentum in inflation is picking up – for more detail, see Global Inflation Watch, 13 February. Additionally, the NFIB’s small business optimism index decreased two points to 89.9 in January, while the survey also revealed a slight rebound in price plans.
In the UK, wage growth was stronger than expected in December at 6.2% (cons: 6.0%), while the unemployment rate surprisingly edged down to 3.8% in December (cons: 4.0%, prior: 3.9%). As wage growth was revised up in November (6.7%), the December print was only a small upside surprise, and importantly wage growth is still declining. This is the first complete release following the past months’ use of experimental data. Given issues surrounding the data quality of the official measures, the MPC traditionally uses a range of indicators to assess the labour market including the KMPC/REC report, which showed broad easing last week. The fully transformed labour force survey will not be published until H2 2024. Note, we will get another job report before the March meeting.
In Germany, German ZEW expectations continue to rise more than expected in February to 19.9 (cons: 17.3), while the assessment of the economic situation declined more than expected to -81.7 (cons: -79.0). Similarly, to the Ifo survey, the decline in the economic situation corroborates that activity in Germany has not bottomed out yet despite the uptick in manufacturing PMIs. That said, with the global manufacturing cycle turning positive and the large rise in expectations there are rays of light for the German economy.
Equities: Global equities ended markedly lower yesterday as the US inflation print came out much hotter than expected. It was not surprising to see defensive value and min vol stocks outperform while VIX moved from 13 to 15. It was also not surprising to see small caps being sold off, but the magnitude – with Russel 2000 down almost 4% – shows that investors are extremely concerned about the CRE segment and US regional banks. While all sectors were lower this was not a classic defensive rotation based on higher recession probability. Banks, REITs and utilities underperformed together as the central bank fear came back (for the “wrong reasons”) and investor behaviour looked very much like what we saw in Q3 last year. The big question is whether this will change the narrative that has dominated since late October? We think the short answer is no. In US yesterday Dow -1.4%, S&P 500 -1.4%, Nasdaq -1.8% and Russell 2000 -4.0%. Most Asian markets are lower this morning but not nearly to the same extent as on Wall Street yesterday. EM have not had the same inflation challenge as the western world as they did not overstimulate their economies during the Covid pandemic. Hence, these markets will be a lot less effected on days when fear of hawkish central banks dominate. European futures are lower this morning while US futures are mixed.
FI: It has been some tough days in the global bond market with rising bond yields with 2Y US Treasury yields rising more than 45bp and 10Y US Treasury yields rising more than 30bp since the start of February. This has been driven by the stronger than expected US labour market data as well as yesterday’s US CPI data. There has been a spill-over effect to the European market where the 2Y and 10Y German government bond yields have risen some 30bp and 20bp in the 2Y and 10Y segments, respectively. Hence, the market continues to price out rate cuts from the Federal Reserve as well as ECB.
FX: The US CPI print triggered big FX moves in yesterday’s session with not least the USD gaining and risk sensitive currencies including the Scandies suffering considerably. Also the CHF traded on the backfoot after much-lower-than-expected Swiss inflation figures while a hot UK labour market contributed to sending GBP higher against most currencies – also after the US inflation release. The rise in yields also contributed to sending USD/JPY above the 150-mark increasing the risk of (verbal) intervention from the Japanese authorities.
