US inflation accelerates in January

US inflation came in hotter than expected for January with headline CPI rising by 3% y/y, ahead of market expectations and faster than the 2.9% recorded a month earlier. Core inflation also accelerated to 3.3% y/y from 3.2% previously. On a sequential basis, CPI rose by 0.5% m/m, its fastest pace since mid-2023, while core CPI rose by 0.4% m/m. Core services remains the principal driver of inflation with shelter price growth remaining elevated though its contribution to the January print did tick marginally lower. Super-core inflation, that strips out shelter, rose by almost 0.8% m/m, its strongest pace since January 2024. Core goods were also only marginally lower, adding another inflation risk to the near-term outlook.

Paired with the still robust employment data released for January the prospect of the Fed cutting in March has been priced out entirely and markets are barely pricing in one cut for 2025 as a whole. The hotter than expected inflation print for January comes ahead of a meaningful pass through from tariffs that US President Donald Trump has imposed on goods imports from China and imports of aluminium and steel. More all-encompassing tariffs could be come from the administration while a tightening of the labour market as a result of a crackdown on migrant workers could push wages higher.

Inflation in India rose by less than expected in January, increasing by 4.3% y/y, down from 5.2% month earlier. Food prices were unchanged y/y after have risen sharply in the prior fourth months and were lower by almost 3% m/m. Fuel prices continued to drop, falling by 1.4% y/y while housing costs were higher by 2.8%. Industrial production in India rose by 3.2% y/y in December, slower than markets had been expecting, a slowdown from 5% recorded a month earlier. Capital goods output was higher by 10% while consumer durables output rose by 8%. The RBI cut rates at the first meeting of the year in early February, taking the repo lower by 25bps to 6.25%.

Today’s Economic Data and Events

• 11:00 TU current account balance Dec: forecast -4bn
• 11:00 UK monthly GDP Dec m/m: forecast 0.1%
• 11:00 UK GDP Q4 q/q: forecast -0.1%
• 17:30 US initial jobless claims Feb 8: forecast 216k

Fixed Income

• US Treasuries plummeted following the release of the January CPI data. Rates-sensitive yields on the 2yr UST jumped 7bps to 4.3548% while the 10yr yield added almost 9bps to 4.6208. Markets have become much more hawkish on medium-term outlook for rates, expecting just two 25bps cuts between now and the end of 2026.
• Bond markets generally were hammered overnight following the move lower in US Treasuries. European, high-yield and emerging market bonds all sold off. Regional credit was weaker across the board.

FX

• In currency markets the initial reaction to the CPI data was a sharp sell off against the US dollar but that was reversed entirely later in the day in light of US President Donald Trump holding a call with his Russian counterpart Vladimir Putin discussing the outlook for the Russia-Ukraine war. EURUSD rose by 0.2% overnight to 1.0383 while GBPUSD closed the day flat at 1.2446. USDJPY pushed higher as its link to the conflict is more indirect: the pair added 1.3% to 154.42.
• Commodity currencies though fared poorly if the prospect of the return of Russian commodity flows is a possible outcome of discussion between the US and Russia. USDCAD rose by 0.1% to 1.4306 while AUDUSD fell 0.2% to 0.628 and NZDUSD dropped 0.2% to 0.5642.

Equities

• US equity markets were broadly negative overnight with a 0.5% drop in the Dow Jones while the S&P 500 fell 0.3%. The NASDAQ fared better, holding steady. European markets had a positive close overnight with a 0.3% rise in the Euro Stoxx index and a similar sized gain in the FTSE 100.
• Local markets had a mixed session. The DFM sold off by 0.6% while the ADX was better with a 0.3% rise. The Tadawul sold off by 0.3%.

Commodities

• Oil prices sold off sharply overnight as markets responded to news on direct Russia-US diplomacy. Brent futures fell 2.4% to USD 75.18/b and WTI was down 2.7% at USD 71.37/b. Long-dated time spreads narrowed sharply with the 1-12 month backwardation in Brent falling from USD 2.31/b earlier this week to just USD 1.90/b now.
• OPEC left its demand growth forecast for 2025 unchanged at 1.45m b/d with most of the contribution coming from emerging economies. For 2026, OPEC also kept its demand forecast unchanged at 1.43m b/d. For supply, OPEC estimates that non-OPEC+ supply will growth by 1.1m b/d in 2025, slightly lower than its previous forecast.
• The EIA released its short-term energy outlook and expects a surplus of 1m b/d on average this year in oil market balances. Elsewhere the EIA reported a 4.07m bbl build in US crude inventories along with draws in gasoline stockpiles. US production ticked higher to 13.5m b/d.