US CPI inflation surprises to the upside

US CPI inflation slowed to 3.1% y/y in January, down from 3.4% the previous month. The slowdown was not as pronounced as the 2.9% the consensus estimate had predicted, and the monthly measure (0.3% compared with predicted 0.2%) and the annual core measure (3.9% compared with predicted 3.7%) also came in hotter than expected. Core inflation was up 0.4% m/m, the strongest rise in eight months for the measure. Shelter was one of the primary drivers of the acceleration in price growth, rising 0.6% m/m after a 0.4% gain in December. Services prices were up 0.8%. The figures reaffirm our view that rate cuts will not begin until June, and that the pace of monetary loosening will be gradual.

UK wage growth slowed in the final quarter of 2023, with average earnings excluding bonuses coming in at 6.2% y/y over October-December, down from 6.7% the previous month. This was higher than the predicted 6.0% however, and November’s reading was revised up from the initial print of 6.6%, leaving wage growth still well above inflation which is around the 4.0% mark. Other employment data was also suggestive of a robust labour market as the headline unemployment rate for the three-month period fell back to 3.8%, down from 3.9% previously and confounding predictions that it would rise to 4.0%. BoE MPC members have publicly pushed back against the need to loosen policy any time soon over the past week, and the labour market data will likely reaffirm their stance. All eyes will now be on the CPI data due today, where annual price growth is forecast at 4.1%.

Germany’s ZEW expectations survey surprised to the upside once again for February as it came in at 19.9, up from 15.2 in January and beating the predicted 17.3. An expectation of easier monetary policy on the back of ECB rate cuts is behind the improved outlook, which came even as perceptions of the current situation deteriorated further. The measure declined to -81.7, from -77.3 the previous month.

Today’s Economic Data and Events

11:00 UK CPI inflation, January, % y/y. Forecast: 4.1%

14:00 Eurozone GDP, Q4, % y/y. Forecast: 0.1%

Fixed Income

• Yields on USTs jumped around 15bps as the CPI data was released, as expectations of rate cutting in March, or even May, diminished. Bets on a May rate cut from the FOMC have pared back sharply following the CPI data, from around 64% prior to the release to 31.0% presently, and only 10.6% for a March cut.
• At the close on Tuesday the 2yr yield was up 18.4bps to 4.6578%, while the 10yr yield ended 13.5bps higher at 4.3145%.
• In the UK, 10yr gilt yields rose 9bps to 4.151%, while German 10yr bund yields rose 3bps to 2.392%.

FX

• The dollar gained against all of its peers as bond yields rose following the CPI print and the dollar index closed up 0.8% on the day.
• The JPY lost 1.0% to the greenback and broke through the 150 mark to close at 150.80. The drop to levels last seen in November could make a historic rate hike from the BoJ more likely in the coming months.
• The commodity currencies lost significant ground despite the rise in oil prices yesterday, with the CAD, the NZD, and the AUD dropping 0.9%, 1.1%, and 1.2% respectively. This was the biggest drop in 11 months for the loonie.
• The EUR dropped 0.6% to 1.0709, while GBP fell just 0.3% to 1.2592, bolstered by the robust labour market data earlier in the day.

Equities

• US equity markets took a tumble after the CPI data release, with the Dow Jones and the S&P 500 both down 1.4% and the NASDAQ dropping 1.8%.
• Chinese markets remained closed on Tuesday but in Japan the Nikkei closed up 2.9%.
• Locally, the DFM added 0.2% and the ADX 0.3%. Saudi Arabia’s Tadawul closed 0.9% higher.

Commodities

• OPEC left its oil demand forecast for 2024 largely unchanged in its February oil market report. The producers alliance expects demand growth of 2.2m b/d this year while non-OPEC supply will expand by 1.2m b/d, slightly lower than its previous expectation.
• OPEC’s secretary general gave a positive assessment of oil demand for 2024, saying the producers’ bloc felt “very robust” about China and noting “phenomenal economic growth” in India according to press reports.
• The UAE’s energy minister, Suhail al Mazrouei, said the country was “committed to working with OPEC+” to “ensure stability of the global oil market.” The UAE has received higher baseline levels for its OPEC+ production quotas to reflect consistent investment in upstream capacity. Elsewhere, Iraq’s oil minister said that the country had cut output to limit production to 4m b/d, in line with its targeted production for Q1 2024.
• Oil prices hit their highest levels in two weeks yesterday with brent futures up 0.9% to USD 82.77/b, while WTI added 1.2% to USD 77.9/b. Prices are falling back in early trading this morning. A report from API showed that US crude inventories were up 8.5mn bbl last week.