US inflation higher than expected in February

US CPI inflation came in a little hotter than anticipated in February at 3.2% y/y, up from 3.1% the previous month. The expectation was that the measure would be unchanged. On a monthly basis, prices were up 0.4% m/m, as expected, and up from 0.3% in January. Core inflation was steady at 0.4% m/m and 3.8% y/y, a moderate slowdown from 3.9% previously but still higher than the predicted 3.7%. Supercore was at 0.5% m/m. The effectively sideways trend in inflation since June last year has proved that the final mile in bringing down price growth to the target level is often the hardest, and there is little in the report that will sway the Federal Reserve towards cutting rates earlier. As such, we hold to the view that the central bank will remain on hold until June at the earliest. The Fed is in its blackout period ahead of the March 21 meeting, meaning that we will not hear any commentary on the inflation figures from FOMC officials but a hold next week (which would mark the fifth hold in a row) is a near certainty and is priced as such by markets.

There were more signs of a slowing labour market in the UK in data released yesterday. The headline unemployment rate surprised to the upside as it rose to 3.9% y/y over the three months to January, from 3.8% previously. The expectation was that it would remain unchanged. Average weekly earnings were up 5.6% y/y over the three-month period, down from 5.8% on the previous reading and lower than consensus prediction of 5.7%. Excluding bonuses, growth was 6.1% y/y, down from 6.2%.

India’s CPI inflation came in broadly in line with expectations at 5.1% y/y in January, unchanged from December’s reading, with food price pressures still salient. More positively for the RBI, core inflation fell to just 3.3%, the lowest in the lifetime of the series back to 2015 and compared with 6.3% a year earlier. The headline inflation rate is around the RBI’s target level, leaving space for the central bank to start cutting its benchmark repo rate from the current 6.5% later in the year. January industrial production data for India was also released yesterday, coming in a little lower than the predicted 4.1% at 3.8% y/y, although the December figure was revised up to 4.2% from the initial print of 3.8%. Manufacturing production was up 3.2% y/y while capital goods were up 4.1% and consumer durables 10.9%.

Today’s Economic Data and Events

11:00 UK industrial production, % y/y, January. Forecast: 0.0%

Fixed Income

• Yields on USTs rose across the curve yesterday after the CPI print came in a little hot and bets of imminent easing faded. The 10yr yield rose 5bps to 4.155%, while on the 2yr the yield also closed up 5bps at 4.5862%.

FX

• The US dollar index closed basically flat against its basket of peers yesterday, up by less than 0.1%. Nevertheless, this was the second session of gains after being under pressure the previous week, with the hotter than anticipated inflation print having bolstered the greenback.
• JPY was a significant loser against the dollar, dropping 0.5% to 147.68, breaking a five-day rally. GBP closed down 0.2% at 1.2793, while the Euro closed flat at 1.0927.

Equities

• The S&P 500 hit a new record high yesterday as it closed up 1.1% on the day. The Dow Jones and the NASDAQ added 0.6% and 1.5% respectively, although they remain off their recent peaks.
• Locally, the ADX closed down 0.04%, while the DFM added 0.1%. In Saudi Arabia, the Tadawul added 0.5%.

Commodities

• OPEC kept its oil demand projections for the next two years unchanged at its meeting this week, at growth of 2.2mn b/d day for this year and 1.8mn b/d in 2025. The group did, however, revise up its global GDP growth forecast for 2024 up slightly, from 2.7% to 2.8%, citing in particular the strong performance from the US and India, even while acknowledging the somewhat weaker performance from the likes of the Eurozone and Japan.
• Oil prices lost ground yesterday, with both benchmarks closing down as US inflation surprised to the upside. Brent futures fell 0.4% to close at USD 81.9/b, while WTI dropped 0.5% to USD 77.6/b.