US consumer sentiment improves

US consumer sentiment continues to improve, with the preliminary University of Michigan sentiment index rising to a higher than forecast 64.6 in January. Both the current conditions and expectations components of the survey improved from December, largely reflecting lower gasoline prices at the pump. However, two-thirds of consumers surveyed expect a recession this year, and the index remains below levels seen at the depth of the pandemic in Q2 2020. Inflation expectations for the coming year also moderated to 4.0% from 4.4% in January, the lowest since April 2021, but long-term inflation expectations remained elevated at 3.0%, above the Fed’s target. 

Several US banks indicated in their quarterly results calls last week that consumers have been drawing down their savings and increasing their use of credit cards, but that overall, consumers were still in a relatively healthy position. Nevertheless, more borrowers are struggling to make payments and the banks increased provisions in Q4, as well as writing off more credit card debt than in Q4 2021. 

Janet Yellen said last week that the Treasury would start taking “special measures” from this week to avoid breaching the US debt ceiling, as the Republican led House of Representatives wants cuts to spending in return for raising the debt ceiling. The issue is likely to become a real problem if not resolved by the summer.

British and EU negotiators are reportedly close to resolving the issues around trade in Northern Ireland. The EU agreed last week to use a real-time UK database to track goods in the Irish sea which could allow a broader customs deal. UK foreign secretary James Cleverly and EU vice president Maros Sefcovic will speak today to see if a comprehensive deal can be reached.

UK data was mixed at the end of last week with GDP for November coming in better than expected (and positive) at 0.1% m/m and indicating that the economy may not be in recession just yet.  However, manufacturing output contracted by -0.5% m/m and overall industrial production was down -0.2% m/m in November. Labour market data due this week will indicate whether employers have continued to hire and also whether wage growth has slowed.

Industrial production in the Eurozone rose 1.0% m/m (seasonally adjusted) and 2.0% y/y in November, suggesting that economic activity is holding up relatively well despite higher energy prices.

China’s trade data for December showed a smaller-than-forecast decline in both imports and exports on an annual basis. Exports fell -9.9% y/y while imports fell-7.5% y/y. The decline in exports is a further sign of weakening global demand in Q4 2022, as well as manufacturing disruptions due to Covid-zero policies. For 2022 as a whole however, exports were up 7%.  Separately, China reported that almost 60,000 people (mostly elderly) have died from Covid-related illnesses in December.

Saudi Arabia’s CPI accelerated to 3.3% y/y in December from 2.9% in November, the highest annual reading since June 2021. Housing and food inflation both accelerated on an annual basis in November, and together they account for over 40% of the consumer basket.  On a m/m basis however, food prices have eased in Q4. Inflation for the whole of 2022 averaged 2.5% and we expect this to accelerate slightly to 3.0% in 2023.

Turkish President Erdogan has indicated that elections scheduled for June 2023 could brought forward to mid-May, giving the opposition parties less than five months to choose a joint candidate. Separately, Bloomberg reports that the Central Bank of Turkiye will reduce the reserve requirement for lira deposits with maturities over three months to zero from 6% currently, in a bid to encourage lira deposits. The change will come into effect on February 3.

Key economic data and events this week

• Tue 17 Jan – UK ILO unemployment rate (3m/3m) forecast 3.7%
• Tue 17 Jan – Germany ZEW survey
• Wed 18 Jan – Bank of Japan monetary policy meeting
• Wed 18 Jan – UK Dec CPI, forecast 10.5% y/y
• Wed 18 Jan – US Dec retails sales, forecast -0.9% m/m
• Thu 19 Jan – Central Bank of Turkey rate decision, forecast on hold at 9%
• Fri 20 Jan – UK Dec retail sales, forecast 0.5% m/m

Fixed Income

• US Treasuries extended their rally last week as the slowdown in US inflation helped to reinforce expectations that the Federal Reserve can move down a gear in tightening policy. A broad index of US Treasuries added 0.6% last week, taking their year-to-date gains to 2.3%. The 2yr UST gave back some gains on Friday with yields adding about 9bps on the day but overall prices still managed to gain on the week. The 10yr UST yield added 6bps on Friday to close the week at 3.5035% although yields were still lower by 5bps on the week as a whole.
• European bonds also pulled back a bit at the end of the trading week with bund yields rising by 1bps to 2.162% and gilt yields adding 3bps to 3.361%.
• Japan sets interest rates this week with markets still expecting no change. Later in the week there will be policy decisions from Malaysia, Indonesia, Norway and Turkey.

FX

• The dollar remains browbeaten by improving expectations for 2023, even if a recession is seemingly taken as a given. EURUSD added 1.8% last week to 1.083 though a dip of 0.2% on Friday took some of the edge of its gains. GBPUSD was up 1.1% last week to 1.2227 while USDJPY fell by 3% to 127.87, its lowest close since May last year.
• Commodity currencies also settled stronger against the US dollar last week though they gave back some gains on Friday. USDCAD closed the week down 0.4% at 1.3396 while AUDUSD added 1.3% and NZDUSD gained 0.4% to 0.6375.

Equities

• Equity markets enjoyed a strong week last week, buoyed by slowing inflation in the US where the Dow Jones, the S&P 500 and the NASDAQ added 2.0%, 2.7% and 4.8% respectively w/w.
• In Asia, China’s reopening continued to drive equity market gains despite rising Covid-19 case numbers there. The Shanghai Composite ended the week up 1.2% while the Hang Seng gained 3.6%. In Japan, the Nikkei closed up 1.2%.
• The DAX was a key gainer in Europe as it gained 3.3% w/w. The CAC added 2.4% and the FTSE 100 1.9%.
• Locally, the DFM added 0.7% w/w and the ADX 0.1%.

Commodities

• Oil prices had their strongest week/week gain last week since early October 2022. Brent futures added 8.5% to USD 85.28/b while WTI rallied 8.3% to USD 79.86/b. Improving sentiment around China’s demand recovery along with hope that central banks will be able to move to a slower pace of monetary tightening will help oil prices in the near term.

• The US oil drilling rig count added 5 rigs last week, taking the total to 623. A survey from the Kansas City Federal Reserve noted that oil firms would like to see WTI prices closer to USD 90/b before it would prompt a “substantial increase in drilling.”

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