February 13, 2024

“Sticky British wage growth has buoyed sterling this morning as inflationary pressures continue to be more persistent in the UK. US CPI is on everyone’s minds today, and we could be set for a big move if hopes for a May cut are dashed.”

Sam Cornford – Head of Trading

Main Headlines

New York Community Bancorp’s increased exposure to commercial real estate has drawn heightened attention from investors, leading to increased scrutiny of regional banks overall. Concerns have risen regarding the health of smaller banks, particularly after the collapse of Silicon Valley Bank in spring last year, which triggered a regional banking crisis. NYCB’s recent earnings release resulted in a significant drop of about 60% in its shares. Research from Apollo indicates that small banks account for nearly 70% of all outstanding commercial real estate loans, adding to investor apprehensions.

Rating agency Fitch issued a warning to the UK government, urging fiscal restraint in its upcoming budget to avoid another downgrade. Fitch, with an AA- rating and a negative outlook on the UK, is concerned about the government’s deficit, which rose to 6% of GDP in 2023. The agency is closely monitoring the government’s spending plans amid hints of potential tax cuts ahead of an impending election.

GBP

A hot labour market report has guided sterling higher this morning as wages rose a more-than-expected 5.8% annualised in the last three months of 2023. Pay growth continues to outpace inflation, which should raise hopes that an uptick in economic activity will manifest in the economic data in the coming months. But it will also boost the Bank of England’s case to hold rates high for an extended period. Data quality issues have ultimately weakened the extent of the move up for the pound, given continued challenges for the ONS around poor response rates to the Labour Force Survey. That said, the picture remains intact of an underlying persistence in inflationary pressures that policymakers will want to see diminish significantly before they are comfortable cutting rates. This stickiness is likely to be reflected in tomorrow’s CPI, which should carry more weight for sterling, where inflation is expected to have picked up again to 4.1% in January.

EUR

The euro edged lower yesterday despite a quiet calendar. Investor focus will be firmly on the ZEW economic sentiment survey this morning, which tends to be a market mover in the short term. Sentiment around Germany should edge up while the outlook for the eurozone as a whole is expected to ease slightly, although the consensus figures still remain around the highest levels for almost a year, bolstered by rate cut optimism. Elsewhere in Europe, the Swiss franc plummeted to a 9-week low against the dollar this morning after CPI inflation printed at 1.3% year-on-year, down from 1.7% the previous month. The franc is now down over 4% this year as SNB intervention fades and rate cuts come into view.

USD

This afternoon’s January US CPI report is on investors’ minds for the dollar today. Statistical base effects should guide the headline figure down below 3% for the first time since 2021, but hopes for the disinflationary narrative will likely hang on the core figure, which is expected to stay as high as 3.7%. The 0.3% consensus for the monthly move in core CPI represents an annualised figure as high as 4%. A stronger-than-expected print here would likely fully quash the prospects for a March cut, which are still priced at 13%, and make markets think twice about the 70% probability pencilled in for May. The NFIB Small Business Index should also improve this afternoon.

Markets

Japan’s Nikkei 225 continues to climb towards its all-time high of 38,915 achieved in 1989 as a weak yen drives foreign buying of Japanese assets. The S&P 500 and the Nasdaq eased slightly later in yesterday’s session ahead of the key US CPI report this afternoon. Chinese and Hong Kong markets remain closed for the Lunar New Year holiday.

Main Economic Events (All Times CET)

8:00am: UK Claimant Count Change and Average Earnings Index
8:30am: Swiss CPI Inflation
11:00am: ZEW Economic Sentiment
12:00pm: US NFIB Small Business Index
2:30pm: US CPI Inflation

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