German inflation slowed in December

Inflation in Germany came in slower than expected for December, rising by 9.6% y/y compared with market expectations of more than a 10% increase y/y. Government intervention to cover some utility costs helped to bring inflation lower even as price pressures remain acute in the centre of the European economy. Eurozone-wide inflation will be released later this week and ECB policymakers have stressed the need to keep tightening policy in order to get inflation lower. Joachim Nagel, head of the Bundesbank and ECB governing council member, cautioned that inflation expectations remained too high and would prompt the ECB to do more in tightening policy.

Turkish CPI inflation slowed to 64.3% y/y in December, down from 84.4% the previous month and lower than the predicted 66.7%. The slowdown had been anticipated due to favourable base effects but inflation is likely to remain high through the year given loose monetary policy and expansionary government spending. Consumer prices were 1.2% higher in December than in November, while PPI inflation marked a m/m contraction at -0.2%, although the annual measure was still at 97.7%. The first MPC meeting of the year is scheduled for January 19; having held at the December meeting, the bank could resume its rate cutting on the back of the latest inflation print but another hold appears the mostly likely outcome for now.

The Riyad Bank PMI for Saudi Arabia slipped to 56.9 in December from 58.5 in November. New order growth and business activity remained robust, but these sub-indices declined slightly from last month. New export orders also rose at a slower pace in December. Firms in the non-oil sector increased hiring at the fastest rate in almost five years, as business activity rose sharply through 2022 and optimism about future output remained relatively high. Staff costs also increased modestly.  Overall input cost inflation slowed from November however, but firms still raised selling prices on average at the fastest rate since March 2022.

Today’s Economic Data and Events

• 09:00 IN Composite PMI Dec
• 11:45 FR CPI y/y Dec: forecast 6.4%
• 19:00 US ISM Manufacturing Dec: Forecast 48.5
• 19:00 US Jolts Nov: Forecast 10m
• 23:00 US FOMC Minutes Dec

Fixed Income

• US Treasuries opened stronger on their first full trading day of the new year with yields down across the curve. The 2yr UST yield fell about 6bps to 4.3699% while the 10yr showed a much wider move, down almost 14bps to 3.7389%. European benchmark bonds also gained, with bunds extending their rally for a second day: 10yr bund yields closed at 2.38%, down 5bps. In the UK, Gilt yields closed at 3.646%, down 1bps.
• In emerging economies, South African 10yr bonds rallied with yields down about 10bps to 10.668%. In Turkey, yields pushed higher by about 7bps to 8.47%. Indian 10yr bonds were near unchanged with yields at 7.321%.

FX

• After a quiet Asian session, currency markets moved strongly toward the dollar on the European open even as UST yields moved lower. The dollar was higher against peers though some gains faded later in the day. EURUSD closed down 1.1% at 1.0548 even as ECB officials continue to trumpet the need to tighten policy further. GBPUSD dropped by 0.6% to 1.1968, its lowest close since the end of November. USDJPY also reversed some of the yen’s recent gains with the pair up 0.2% at 131.02.
• Commodity currencies showed consistent selling against the dollar with USDCAD up 0.7% at 1.3671 while AUDUSD dropped 1.1% to 0.6727 and NZDUSD fell 1% to 0.6252.

Equities

• US equity markets started the year on the back foot as all three benchmark indices closed down. While the Dow Jones’ losses were marginal at 0.03%, the S&P 500 lost 0.4% and the NASDAQ 0.8%.
• There was greater positivity elsewhere, as in Europe indices traded up. The CAC, the DAX, and the FTSE 100 added 0.4%, 0.8%, and 1.4% respectively.
• Local markets were mixed as the DFM dropped 0.1% but the ADX added 0.3% and Saudi Arabia’s Tadawul closed 0.8% higher.

Commodities

• Oil prices fell on their first full trading day as worries that China will suffer through a large wave of Covid-19 infections weigh on the demand outlook. Brent futures dropped 4.4% overnight to USD 82.10/b while WTI fell by 4.1% to USD 76.93/b.
• A Bloomberg survey of OPEC production showed the producers’ alliance raised output by 150k b/d in December to 29.14m b/d. Output jumped in Nigeria, up 150k b/d to 1.35m b/d while Saudi Arabia increased output by about 10k b/d. Production in the UAE declined modestly.

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