January 12, 2024

“A hot US CPI inflation print yesterday raised market volatility but ultimately left rate cut expectations unmoved as little was provided to clarify the path for inflation. UK GDP impressed this morning, but an already-strong pound failed to lift from its year-to-date highs.”

Tim Hallinan – Trading Director

Main Headlines

The US and UK launched air and sea strikes against Houthi military targets in Yemen in response to the group’s attacks on ships in the Red Sea, expanding the regional conflict. Shipping jitters drove brent crude up 1.4% to $79.09, as concerns mount that a wider conflict could disrupt oil supplies. An escalation to the Persian Gulf could have a significant impact on the global economy, ramping up shipping costs and likely driving haven flows to the US dollar, Swiss franc, and Japanese yen.

London Mayor Sadiq Khan stated that Britain’s exit from the European Union has already shrunk its economy by 6%, equating to an annual cost of £140 billion ($178 billion). The mayor, from the Labour Party, which opposed Brexit in the 2016 referendum, relied on a report by Cambridge Econometrics to make this assessment. According to the report, the economic shortfall could reach 10% by 2035 if Britain had chosen to remain in the EU.

GBP

Sterling has struggled to derive strength from its GDP growth beat earlier, hovering below a fresh two-week high reached early this morning The UK economy bounced back in November to grow a more-than-expected 0.3% after it shrank 0.2% in October, although a contraction in December would be enough for a technical recession. While the wider view remains of a broad stagnation throughout 2023, recent pickups in the leading economic data has brightened the outlook overall, and a return to modest economic expansion is expected by many to emerge in the coming months. Markets brushed off the news and sterling surprisingly fell immediately after release, only bouncing back later amid weakness in the broad dollar. The next input for sterling traders is the claimant count change and wage growth index on Tuesday.

EUR

The euro has consolidated around its highest level since its losses in the first trading session of 2024. ECB staff forecasts expect rising disposable incomes and growth in exports to strengthen growth in early 2024, after a dismal Q4 saw high borrowing costs and weak demand depress activity. They also noted, however, that heightened geopolitical risks could spark a resurgence in price shocks and inflationary pressure. Despite consensus pointing to a further contraction, French consumer spending jumped a healthy 0.7% in November in data released this morning. Amid a relatively sparse economic diary today, euro traders will look to US producer price data for further cues today.

USD

Hot CPI inflation data failed to unsettle the leading market narratives yesterday, leaving the dollar index down 0.05% by the end of the session. Headline consumer price growth climbed from 3.1% to 3.4% in December, above the 3.2% consensus, with over half of the 0.3% monthly increase attributable to swelling shelter prices. The financial markets did not bite, though, presumably because the core measure muddied the signal by printing broadly as expected, despite the overall picture being greatly unsupportive of current market pricing. Investors are still pencilling in a 60% chance of a March cut and 140bps in total this year, a prospect that looks increasingly unlikely as CPI seems resistant to falling below the 3% mark. The stall in disinflation puts a March cut under immense pressure, given that there are only two more CPI prints left to convince the Fed that a sustainable path to 2% is truly within reach – a correction seems imminent. In other developments, unemployment claims showed continued resilience, refusing to let up as it posted another 202k figure. Growth in producer prices come next this afternoon, which economists expect to have jumped to 0.1% month-on-month.

Markets

European equity futures are indicating a positive opening on Friday, aligning with gains seen in Asian markets. Meanwhile, US futures are lower as investors await producer price data. Major US banks are set to kick off the earnings reporting cycle, with the bar high for earnings amid stretched equity valuations. Asian stocks are set for a weekly gain, with Japan leading the rally as the Nikkei hit a fresh 30-year high.

Main Economic Data/Central Banks/Government (All Times CET)

2:30am.: Chinese CPI and PPI
8:00am.: UK GDP
8:45am.: French Consumer Spending and Final CPI
2:30pm.: US PPI

Corporate Events

Full year earnings season kicks off with bank stocks including JP Morgan, Bank of America, Wells Fargo, Citigroup, and BNY Mellon.

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