FOMC minutes point to more gradual easing

The minutes from December’s FOMC meeting paint a similarly hawkish picture to the post-meeting press conference and revised dot plot. Even as the Fed did go ahead with the anticipated 25bps cut, officials were leaning towards progressing at a slower pace over the following months, with the committee ‘at or near the point at which it would be appropriate to slow the pace of policy easing.’ Inflation data, ongoing consumer strength, and a resilient labour market were among the factors driving this outlook, with ‘almost all participants judging that risks to the inflation outlook had increased’, and some saw ‘merit’ in remaining on hold last month.

US employment data released yesterday was somewhat mixed. The ADP employment change for December came in at 122,000, down from 146,000 the previous month and lower than the predicted 140,000. This was the lowest measure for the index since August, with a mixed performance across different sectors. Education, health services and leisure and hospitality were among the biggest gainers while manufacturing, mining, and professional and business services were among those registering a decline. Wage growth for those remaining in their existing positions rose by 4.6% y/y, the slowest since mid-2021. Meanwhile the weekly initial jobless claims data were at 201,000 in the week to January 4, lower than the predicted 215,000 and down from 211,000 on the previous print, though the Christmas period likely played a role in limiting layoffs. Continuing claims rose to 1.867mn in the week to December 28, up from 1.834 previously.

China CPI inflation was at 0.1% y/y in December, in line with expectations and down modestly from 0.2% in November. Price growth has remained weak despite the stimulus measures implemented by the authorities through the end of 2024. Factory gate inflation, or PPI, was down -2.3% y/y, a slowdown from the -2.5% fall in prices the previous month but still the 27th consecutive deflationary reading.

There was more weak data out of Germany yesterday as both retail sales and factory orders logged a m/m decline in November. Factory orders were down 5.4% m/m, the worst print in three months and a greater fall than the predicted 0.2% decline, while on an annual basis orders were 1.7% lower than in November 2023. Retail sales also disappointed, falling 0.6% m/m, although the previous month’s contraction was revised to a lesser 0.3% from 1.5% previously. Sales growth was positive on an annual basis, up 2.3% y/y. The poor performance in the German economy, and in the manufacturing sector in particular, has been reflected in a weak economic sentiment index for the Eurozone and the ESI fell to 93.7 in December, down from 95.6 previously and missing the predicted 95.6. Industrial confidence was even weaker at -14.1, down from -11.4, although services saw a modest improvement to 5.9 from 5.3 in November.

Today’s Economic Data and Events

11:00 Germany industrial production, % m/m, November. Forecast: 0.5%

Egypt CPI inflation, % y/y, December

Fixed Income

• UK treasuries sold off further yesterday, with yields on the 10yr gilt rising by 11bps to 4.796%, the highest level since 2008, as stagflation fears mount.
• There was little movement in USTs yesterday ahead of Friday’s NFP report, although there was some marginal steepening as the 10yr closed up by 0.4bps to 4.6892% while the 2yr fell by 0.8bps to 4.2828%.

FX

• The US dollar saw more gains yesterday, rising by 0.5% against its basket of peers. The index remains near highs last seen in 2022.
• Much of yesterday’s gains came against the pound which is under concerted pressure with gilts selling off. It lost 0.9% yesterday to close at 1.2363, levels last seen in April last year.
• Elsewhere, EUR closed 0.2% lower at 1.0318, while JPY lost 0.2% to 158.35.

Equities

• The FTSE 100 was a comparative bright spot in European equities yesterday as it added 0.1%, benefitting from the cheaper pound. The more UK-focused ended the day down 2.0%, however. Other European indices were also in the red as DAX lost 0.1% and the CAC fell 0.5%.
• Locally, the DFM ended the day 0.1% lower while the ADX added 0.3%. Saudi Arabia’s Tadawul closed down 0.2% and Egypt’s EGX30 fell 0.5%.
• In the US, the NASDAQ closed down 0.1% while the S&P 500 and the Dow Jones added 0.2% and 0.3% respectively, US markets will be closed today for former President Jimmy Carter’s funeral.

Commodities

• The weekly API report showed that US crude stockpiles fell by 4.0mn bbl last week, giving a modest boost to oil prices initially but it was a volatile session and these gains were later erased.
• At the end of the day, Brent futures were down 1.2% to USD 76.2/b, while WTI fell 1.3% to USD 73.3/b.