Bank of England holds rates unchanged

The Bank of England held the Bank Rate at 5.25% in its first MPC meeting of 2024 with two voting members still supporting a hike. The BoE noted that inflation had fallen below expectations already by December and expects to see CPI inflation to the 2% target in Q2 2024. There seemed to be a similar message to the Federal Reserve from governor Andrew Bailey that the BoE needed to see “more evidence that inflation is set to fall all the way…and stay there” before they would be prepared to cut rates.

The Central Bank of Egypt hiked its benchmark interest rates by 200bps at its first meeting of 2024, taking the overnight deposit rate to 21.25%. This was the first time the bank had hiked rates since August, and confounded expectations of another hold by the bank. However, the tightening of policy is likely another indication that a new agreement with the IMF around the exchange rate and an enlargement of the support programme is near, after reports of intensified discussions this week. In its communique, the bank highlighted that monthly inflationary dynamics had been greater than anticipated, with fiscal consolidation measures and supply side pressures contributing, along with elevated broad money growth. It also noted the risks stemming from ‘geopolitical uncertainty and ongoing maritime trade disruptions…’

Inflation in the Eurozone cooled to 2.8% y/y for January according to preliminary estimates. On a monthly basis CPI inflation fell 0.4% from an increase of 0.2% a month earlier. Core inflation eased to just 3.3% y/y from 3.4% a month earlier, slightly stronger than markets had been expecting. The ECB kept rates on hold at its first meeting of 2024 last week noting balanced risks to the inflation outlook.

The ISM manufacturing index improved in January, rising to 49.1. While still in contraction, the manufacturing index hit its highest level in the last 15 months. The new orders subcomponent rose by the most in the last three years. Prices paid also increased, rising for the first time since April last year.

Today’s Economic Data and Events

• 17:30 US Nonfarm payrolls Jan: forecast 185k
• 17:30 US Unemployment rate Jan: forecast 3.8%
• 19:00 US Factory orders Dec: forecast 0.2%

Fixed Income

• US Treasury yields nudged slightly lower overnight with the 2yr UST yield at 4.2024% while the 10yr dipped 3bps to 3.8802%. Bond markets generally had a bid day overnight with gains across corporate and high-yield bonds. Gilt yields fell about 5bps to 3.741%.

FX

• The dollar closed weaker against peer currencies overnight with EURUSD adding 0.5% to 1.0872 while GBPUSD gained 0.4% to settle at 1.2744 with no material change prompted by the Bank of England. USDJPY moved lower for a second day running, down 0.3% at 146.43.
• Commodity currencies also had a stronger day with USDCAD down 0.4% at 1.3386 while AUDUSD edged higher by slightly less than 0.1% to 0.6572 and NZDUSD rose 0.4% to 0.6144.

Equities

• Equity markets in the US rose overnight with the Dow Jones up a bit less than 1% and the S&P 500 adding 1.3% while the NASDAQ increased 1.3%. European markets fared worse with the EuroStoxx index down 0.2% and the FTSE dropping 0.1%.
• Asian markets have opened positively in early trade today with a 1% rise in the Nikkei while the Hang Seng has added a robust 1.8%.

Commodities

• Oil prices fell overnight with April Brent futures down 2.3% at USD 78.70/b while WTI declined by 2.7% to USD 73.82/b. OPEC+ affirmed the current production levels as appropriate at the meeting of the joint ministerial monitoring committee which will meet again in early April. Press reports indicate that OPEC+ would take a decision on whether to extend its production restraint beyond Q1 in early March.
• Bloomberg estimates of OPEC production for January showed a decline in output from Saudi Arabia of 60k b/d to 8.94m b/d, in line with its target level, while Iraq and Kuwait also provided cuts of more than 100k b/d. The UAE’s output is estimated to have increased by 20k b/d to 3.13m b/d.