UK inflation accelerated in January

• Inflation in the UK came in stronger than market expectations for January with CPI inflation up 5.5% y/y. Higher clothing and furnishing costs as well as rising housing prices helped to push headline inflation upward. The Bank of England expects that CPI will peak at more than 7% in April when higher energy utility prices take effect. Elevated inflation has already pushed the Bank of England to raise rates twice since the December MPC meeting and will set the tone for further tightening later this year. Markets are pricing in one and a half hikes for the March 17 meeting with a total of six 25bps hikes priced in for this year.
• Minutes from the January FOMC meeting of the Federal Reserve line up a rate hike for March as is widely expected by the market and ourselves as policymakers noted that the US economy was in a much stronger position then it was at previous starts to hiking cycles. According to the minutes “most” participants agreed that rates should go up faster than they did in the last hiking cycle from 2015 which may open the way for a 50bps hike in March as we currently expect. The Fed also alluded to their plans to draw down the balance sheet of the central bank but gave no further indication on the timing or scale of any rundown.
• Since the January FOMC meeting data has continued to come in favouring the start of rate hiking cycle with US jobs growth in January outperforming market expectations and inflation running at its highest level in 40 years. There appear to be few near-term catalysts for the data to move against starting rate hikes in March this year and we maintain our view that the initial hike will be large at 50bps followed by 25bps hikes in the meetings to September.
• Retail sales in the US rose strongly at the start of the year, up by 3.8% m/m in January compared with a drop of 2.5% in December. Online sales and large purchases—furniture and vehicles—all rose considerably in January suggesting that surveys of declining investor confidence in the face of high prices aren’t necessarily affecting behaviour. Retail sales at bars and restaurants, however, did decline as consumers were likely still cautious in the face of the spread of the Omicron variant of Covid-19.
• The UAE and India have concluded negotiations for a comprehensive economic partnership agreement that began in September last year. There was little firm detail on what next steps would be taken to further strengthen the economic relationship between the two countries but it follows on from a flurry of trade negotiations that the UAE has carried out with Turkey and the Philippines earlier this week. The UAE and India are notionally committed to increasing bilateral trade to as much USD 100bn over the next several years, essentially double its current level.

Today’s Economic Data and Events

15:30 TU One-week repo rate: forecast 14%

17:30 US Housing starts Jan: forecast 1.7m

17:30 US Continuing claims Feb 5: forecast 1.603m

Fixed Income

• The minutes of the January FOMC didn’t give the US Treasury market much that they aren’t already pricing in so reaction was relatively muted. If anything, no explicit endorsement of a larger than 25bps hike at the March FOMC was taken as somewhat less hawkish and added to a rally in 2yr USTs that was already underway. Yields on 2yr USTs fell around 6bps overnight to 1.5208% while the 10yr closed essentially unchanged.
• European bond markets continue to trade headlines, moving higher as US and other NATO country officials dismiss claims of Russian troops moving away from front-line positions. Yields sank across the bund curve with 10yr yields down 3bps to 0.274% while gilts seemingly ignored the faster than expected UK inflation print with yields ending the day lower.
• Emerging market bonds are showing no consistent uniform movement on either the FOMC minutes or news out of Eastern Europe. Russian bonds managed to extend their gains overnight with yields down by 9bps to 9.690%. South African bonds also moved higher with yields closing at 9.512%, down 6bps, while Indian yields ticked up slightly.

FX

• A return to risk appetite helped to push the dollar lower against most peers overnight even as the situation in Eastern Europe remains unresolved. EURUSD added 0.12% to close at 1.1373 while GBPUSD jumped 0.35% to 1.3586, spurred higher by the elevated January inflation print and the market pricing in rate hikes from the next Bank of England meeting. USDJPY held relatively stable at 115.52.
• Commodity currencies generally moved higher against the dollar. USDCAD fell 0.24% in favour of the loonie at 1.2687 while AUDUSD rallied 0.6% to 0.7195 and NZDUSD added almost 0.6% to 0.6679.

Equities

• Some of the recent volatility in equity markets dampened down yesterday as speculation over events in Eastern Europe oscillated. What movement there was in Europe was largely negative, as the FTSE 100 (-0.1%), the CAC (-0.2%) and the DAX (-0.3%) all closed lower.
• It was similarly quiet in the US later in the day as the S&P 500 closed up 0.1% but the NASDAQ lost -0.1% and the Dow Jones -0.2%.
• Sentiment was more positive within the wider region. The EGX 30 added 0.04% and the Borsa Istanbul 0.2%, but closer to home the Tadawul added 1.2% while locally the ADX (0.7%) and the DFM (1.4%) both had strong gains.

Commodities

• Oil markets reversed some of the heavier selling from earlier in the week with Brent futures ending yesterday up 1.6% at USD 94.81/b and WTI adding 1.7% to USD 93.66/b. Conflicting headlines on the situation in Eastern Europe are showing a bias toward higher prices at the moment.
• However, prices have moved down more than 2% in each benchmark in early trade today in response to comments from an Iranian official that the restoration of the JPCOA was “closer than ever.” If Iran were able to resume oil exports free of sanctions then markets would loosen considerably, particularly in the second half of the year.
• Commercial crude inventories rose last week by 1m bbl but the gains were dwarfed by draws across the rest of the barrel. Total commercial petroleum stocks fell 9.9m bbl last week, led lower by propane given the cold weather conditions across much of the US at the moment. US oil production was unchanged at 11.6m b/d.

Click here to download charts and tables