- Long the global outlier on inflation pressures, Japan has proved no different at the start of 2022. Headline CPI inflation decelerated in January to 0.5% y/y from 0.8% previously while core inflation, stripping out more volatile costs like energy and food, fell to just 0.2%. Compared with nearly all other developed economies, Japan’s inflation picture is the only one that is below target at present and indeed at more than 150bps below the Bank of Japan’s inflation target is massively underperforming. The Bank of Japan has showed no haste to normalizing policy and we expect conditions to remain highly accommodative in 2022.
- St Louis Federal Reserve president James Bullard indicated that policy rates would need to move above neutral levels in order to dampen down inflation. Bullard’s estimate of a neutral rate of 2% is seven 25bps hikes away from where the Fed funds rate is at the moment and we expect that the Fed will indeed hike enough this year to get to 2% by the end of the year. Bullard has been among the most vocally hawkish members of the Fed, pushing for 100bps of hikes in H1 this year. However, whether he will be able to convince other FOMC members or his commentary is just being used to tighten financial conditions on their own is an open debate.
- US jobless claims ticked upward in the week ending February 12, rising by 23,000 to a total of 248,000. That increase was larger than markets expected and may distort the February non-farm payrolls reading as the survey was taken at the same time data is collected for the critical jobs report. We do not expect the Fed to be too worried about small variations in employment activity provided they have some visibility that the pathway for labour markets is still positive.
- The Turkish central bank kept its benchmark one week repo rate on hold at 14.00% yesterday, in line with consensus expectations. The bank’s cutting cycle has paused as inflation has surged since it began lowering rates, with the 48.7% CPI print in January pushing real interest rates to nearly -35%.
- The IMF has released its latest Article IV report on the UAE, commending the authorities on their efforts at managing the pandemic and its impact on the economy. The IMF estimates GDP growth reached 2.2% in 2021, with non-oil sectors growing 3.2%. For this year, the Fund expects growth to accelerate to 3.5%, with non-oil growth at 3.4%. The IMF expects a slight fiscal deficit this year of -0.2% of GDP, while the UAE’s debt levels remain relatively low at under 40% of GDP.
- Dubai’s hotel occupancy slipped to 70.7% in January from 77.3% in December, but was up 5pp from January last year. Revenue per available room increased 58% y/y according to data from STR.
- The tense scenario in Eastern Europe remains very much in force with both Russia and Ukrainian authorities blaming each other for breaking cease-fire rules. The US and other NATO countries have dismissed Russian claims that troops are indeed being pulled back from border positions while Russia continues to insist it has no intention of invading. Even in the case that no invasion occurs, financial markets could endure some attrition should this tense scenario play out for protracted period.
Today’s Economic Data and Events
11:00 UK Retail sales Jan y/y: forecast 9.4%
11:45 FR CPI y/y Jan: forecast 2.9%
19:00 US Existing home sales Jan: forecast 6.1m
Fixed Income
- With anxiety over the situation in Eastern Europe still weighing on markets, benchmark bonds received a haven bid overnight. Yields on the 2yr UST dropped around 5bps to 1.4662% while the 10yr yield fell around 8bps to 1.9615%. Until a resolution of the Eastern Europe crisis comes about, we would expect the kind of two-way action we’ve seen in the last fortnight to persist.
- Across Europe bonds were generally higher as well. Yields on the 10yr gilts dropped to 1.46% while the 10yr bund yield fell more than 4bps to 0.228%. Even as a risk-off tone permeates markets at present, emerging market bonds caught a lift overnight with South African and Indian bonds moving higher. Russian bonds were the notable outlier with yields up 7bps to 9.760%.
FX
- Currency markets settled on a relatively neutral footing overnight as a risk-tone characterized markets generally. EURUSD slipped to 1.1361, down 0.11% on the day but is already getting much of those gains back. USDJPY moved in favour of the yen on a risk haven bid with the pair moving down 0.5%. Likewise USDCHF fell a second day running in favour of the franc, down 0.25% to 0.9204.
- GBPUSD was a relative outperformer, rising by 0.2% to 1.3616 as markets look to an aggressive BoE hiking cycle. In commodity currencies both CAD and AUD closed weaker. USDCAD moved up 0.17% to 1.2708 while AUDUSD fell 0.1% to 0.7195. NZDUSD managed a gain of 0.15% to 0.6689.
Equities
- Equity markets were under pressure yesterday as concerns around the situation in Ukraine heightened once more, with travel stocks performing especially poorly. In Europe, the CAC lost -0.3%, the DAX -0.7% and the FTSE 100 -0.9%.
- The selling was even more pronounced in the US as the Dow Jones (-1.8%), the S&P 500 (-2.1%) and the NASDAQ (-2.9%) all sold off. As attention turns to tightening monetary policy, some of the more speculative technology stocks on the NASDAQ are coming under concerted pressure and the index is now down -12.3% ytd.
Commodities
- Oil prices settled lower overnight with both Brent and WTI dropping by about 2%. Brent settled at USD 92.97/b while WTI fell to USD 91.76/b. Markets may be taking a breather amid the uncertainty of what will happen in Eastern Europe but the declines may also reflect expectation that the Iran nuclear deal may actually move forward. Press reports have leaked a preliminary draft of an agreement that would be applied in phases.
- The haven bid has supported gold with prices up the last two days. Spot gold rose by 1.5% overnight to settle at USD 1,898/troy oz.
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