March 12, 2023

“Cooling wage growth and easing pressures in the labour market will please the Bank of England this morning, denting sterling’s strong March rally, but the UK is still set to lag the Fed and the ECB. US CPI is the headline event today, and we expect some volatility whichever way the data lands.”

Tim Hallinan – Trading Director

Main Headlines

US President Joe Biden outlined his $7.3tn budget proposal for a potential second term yesterday, where he aimed to persuade Americans that he can manage the economy more effectively than Trump. It included plans to increase taxes by trillions of dollars on corporations and wealthy individuals to reduce the deficit and fund new initiatives for lower-income individuals, although Congress is unlikely to pass it in its current form.

Rupert Murdoch’s News Corp and the owner of the Daily Mail have reportedly engaged in discussions regarding a potential collaborative acquisition of the Telegraph, in partnership with the UAE-backed investment fund RedBird IMI, according to Bloomberg. The potential buyout raised concerns about foreign involvement in media reporting, with critics suggesting it could pose a threat to Britain’s democracy.

GBP

Slowing wage growth has guided sterling lower this morning. British wage inflation slowed from 5.8% to 5.6% in the three months up to February, landing slightly below the 5.7% consensus estimate. Unemployment also ticked up to 3.9% and vacancies fell by 43K to 908K which, while encouraging, certainly does not represent a victory for the Bank of England, who will still be looking for a cautious approach to cutting this summer, particularly given the well-known data quality issues associated with the report. As the BoE’s Mann contested yesterday, labour market price pressures are still far from consistent with the 2% target. The pound has naturally moved lower on the cooling numbers, but the lag to the Fed that has kept it buoyed this year is very much still intact. GDP tomorrow is expected to have expanded by 0.2% in January, reflecting the positive leading indicators, and should give policymakers the confidence that a faltering economy will not force a move before they are comfortable.

EUR

The euro has drifted lower from its peaks on Friday, as it awaits US CPI for its next big move. German CPI was confirmed at 2.5% in February this morning in today’s only piece of eurozone data – US inflation will be the driving force behind the common currency’s movements today. ECB speakers in the second half of the week should drum up some price action, though, with last week’s press conference in the back of minds.

USD

Cooling risk appetite spurred a modest dollar recovery yesterday, with attention focused on this afternoon’s big CPI release for February that will hold the key to expectations for a June or even May cut. The headline measure should stay stable at 3.1% and the core month-on-month print, which caught everyone’s eye with a strong 0.4% number last month, should cool to a still hot 0.3%. The key question for this data is whether January’s resurgence was the beginning of a durable trend, or rather just a blip in an uneven disinflation process. A downside surprise would likely see hopes for a May cut flare back up again, while an upside surprise could derail the consensus for one in June and trade the dollar higher.

Markets

Stock indices cooled off slightly as risk appetite eased but remained around record highs across North America, Europe, and Asia. Gold’s record-breaking rally has stalled over the past few days and sunk below the $2,180 level this morning.

Main Economic Events (All Times CET)

8:00am: UK Claimant Count Change and Wage Growth
11:00am: US NFIB Small Business Index
12:00pm: BoE’s Mann speaks
1:30pm: US CPI

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