Long-run US inflation expectations rise to 30-year high

The final University of Michigan consumer sentiment survey for February printed well below the initial reading of 67.8, dropping to a value of 64.7 from 71.7 in January. There were falls in both the current conditions and expectations components, although the declines were largely along political lines with democrats and independents materially more downbeat. Perhaps more concerningly for the Fed, the final print showed 5-10yr inflation expectations rising to their highest level in more than 3 decades, reaching 3.5% in the February survey.

The preliminary February US PMI print surprised on the downside, with the composite index falling to a value of 50.4 from 52.7 the month prior. Consensus expectations had been for a rise in the headline measure to 53.2. The fall was driven by a decline in the services sub-component which fell into contractionary territory by dropping to a value of 49.7 in February, from 52.9 in January. The manufacturing component saw a marginal gain to 51.6 on the month from 51.2.

The flash Eurozone composite PMI remained unchanged at a value of 50.2 in February, marginally lower than consensus expectations for a rise to 50.5. The manufacturing sub-component remained in contractionary territory, despite rising on the month to reach a value of 47.3 from 46.6 in January. The services sub-component remained above the neutral-50 mark, although the pace of expansion slowed as the index declined to a value of 50.7 in February from 51.3 the month prior. The survey suggests that price pressure remains a concern, with the output price measure at its highest level in 10 months. Within the Eurozone, the French composite index declined sharply, dropping to a value of 44.5 in the preliminary February print, driven by a fall in the services sub-component. The German composite index saw a rise to 51 in February, from 50.5, with improvements in both the services and manufacturing indices.

UK retail sales jumped 1.7% m/m in January, above both the 0.5% gain that had been expected and the downwardly revised 0.6% m/m contraction seen in December. The January print marks the fastest pace of growth since May 2024. Much of the strength on the month came from online sales, which rose 2.4% m/m, and a 5.6% m/m increase in food sales. Some of the strength of January’s retail sales may however have come at the expense of other sectors, with the ONS report suggesting that the jump in food sales was due to households spending less money on restaurants over the course of the month.

February’s flash composite PMI measure for the UK fell marginally, declining to 50.5 from 50.6 in January. The services and manufacturing sub-components moved in offsetting directions, with the services measure rising to a value of 51.1 from 50.8, while the manufacturing index fell further below the neutral-50 mark as it declined to a value of 46.4 in February from 48.3 the month prior.

Today’s Economic Data and Events

• 13:00 IFO business climate, February. Forecast: 85.8
• 14:00 EC CPI, February. Forecast: 2.5% y/y

Fixed Income

• US treasuries gained at the end of the day on Friday, with weaker PMI and University of Michigan consumer sentiment stoking concerns about economic momentum. Both the 2yr and 10yr yields fell 7bps, reaching 4.1980% and 4.4313% respectively. Relative to the previous week, the 2yr yield ended the week 6bps lower, while the 10yr yield was 4bps weaker.
• Major European bond yields were also lower on Friday. The 10yr Gilt yield fell 3.5bps to 4.57% and the 10yr Bund declined 6bps to 2.467%.

FX

• The dollar spot index reversed some of Thursday’s fall, gaining 0.25% on Friday to leave the weekly decline at 0.1%. EURUSD fell 0.4% to 1.0458 and GBPUSD dropped 0.3% to reach 1.2632. USDJPY fell 0.25% to 149.27.
• Commodity currencies declined against the dollar on Friday. AUDUSD fell 0.67% to 0.6357, NZDUSD fell 0.36% to reach 0.5742, and CADUSD rose 0.35% to 1.4224.

Equities

• US equities dropped sharply on Friday, driven by profit-taking on technology stocks and weaker February survey data. The Dow Jones fell 1.7% on the day, declining 2.5% on a week-on-week basis. The NASDAQ declined 2.2% on Friday and was 2.5% lower w/w. The S&P 500 dropped 1.7%, both on the day and over the course of the week.
• European equity markets were mixed on Friday. The Eurostoxx 50 gained 0.25%, the CAC 40 gained 0.4% and the DAX fell 0.12%. The FTSE 100 was broadly unchanged, falling by a marginal 0.04%.
• Locally, the DFM closed 0.4% lower while the ADX was flat on the day.

Commodities

• Brent futures fell 2.7% on Friday to reach USD 74.43/b, and WTI dropped almost 3% to USD 70.4/b. Both benchmarks were lower on a week-on-week basis, with Brent and WTI futures 0.4% and 0.5% weaker, respectively.