Morning Report
February 14, 2024
“US CPI sent shockwaves through the financial markets yesterday, adding further fuel to the dollar rally as investors revise expectations for rates – the 160bps of expected cuts in December are now 90. UK CPI had the opposite effect for sterling this morning, and we will be looking to central bank speakers this afternoon to gauge their reactions.”
Tim Hallinan – Trading Director
Main Headlines
Germany’s federal government is set to slash its growth forecast for the German economy to a mere 0.2%, a sharp downgrade from the previous estimate of 1.3%, according to a Reuters source. This adjustment, to be unveiled next week, reflects challenges such as sluggish global growth and a significant budget shortfall resulting from a ruling by the German constitutional court.
Britons could face shortages of certain tea varieties due to shipping disruptions in the Red Sea, according to warnings from the British Retail Consortium. Temporary disruptions have been reported for some black tea lines, with delays also affecting flavoured varieties. This marks the first food item to be affected by the shipping issues caused by attacks in the Red Sea, which have impacted trade routes between Asia and Europe.
GBP
The past 24 hours have been particularly volatile for sterling – the pound is now down 1% from its post-wage growth rally peak against the dollar yesterday morning. Hot US CPI yesterday afternoon squeezed sterling and eliminated the strength gained by higher-than-expected wage growth, and this morning UK CPI pushed it a leg lower as it printed at 4.0% again in January, defying expectations for a reacceleration to 4.1%. Furniture and furnishings were the key source downwards pressure on the yearly figure, having fallen 5.2% in January. The softer figure prompted markets to pile on an extra 15bps of expected cuts from the Bank of England this year, denting the pound’s yield premium that has buoyed it so far this year. This afternoon, investors will be keen to gauge Governor Bailey’s reaction to the CPI print when he speaks at the House of Lords, before they turn their attention to the Q4 GDP data tomorrow that should confirm a mild technical recession in the second half of last year.
EUR
The euro fell sharply lower against the dollar and sterling yesterday amid some strong inflationary pressure abroad, although this morning’s British CPI read has nullified its move against the pound to leave GBP/EUR flat. The ZEW economic sentiment survey surged again for the euro area to a one-year high at 25.0, as the light at the end of the tunnel nears for the stagnating economy. But the positive impact was ultimately lost in the larger moves driven by the headline data elsewhere. This theme is likely to continue through the rest of the week – today’s data diary includes only some second estimates of the Q4 GDP and employment change for the currency bloc, although speeches from the ECB’s Vujcic and Nagel should keep investors busy this afternoon.
USD
A sticky CPI inflation figure propelled the US dollar to a three-month high yesterday evening as rate cut expectations were slashed. The headline yearly figure landed at 3.1% versus a 2.9% forecast, but the most troubling figure for the Fed was arguably the monthly figure for core CPI, which strips out the fluctuating impacts of food and energy prices. At 0.4% and the highest for seven months, the figure annualises somewhere in the 4-5% range, suggesting that underlying inflationary momentum spiked aggressively in January to far higher than the 2% target. This all but quashed any residual hopes for a cut in March, pushing the 10-year Treasury yield to its highest in 2.5 months. Market pricing has almost converged with the Fed dotplot from December that pencilled in three 25bps hikes this year, with the swap market implied figure now at 93bps beginning in June. The events were enough to push USD/JPY back above 150 and into intervention territory, drawing warnings from Japanese currency officials this morning. Retail sales data tomorrow will be the next figure to digest, but in the meantime Barr and Goolsbee speak this afternoon.
Markets
US stocks and Treasuries slumped yesterday after the CPI data dashed hopes for rate cuts this year. The S&P 500 fell over 1.3% in yesterday’s session alone and the move spread to Europe, weighing on the Stoxx 50. The FTSE 100, meanwhile, has staged a recovery this morning, boosted by hopes for earlier cuts in the UK.
Main Economic Events (All Times CET)
8:00am: UK CPI
10:30am: UK House Price Index
11:00am: Euro Area GDP 2nd Estimate
4:00pm: BoE Governor Bailey speaks
10:00pm: Fed’s Barr speaks
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