US CPI higher than expected in January

On an annual basis the US CPI data for January came in slightly higher than had been expected. The headline measure rose 6.4% y/y in January, compared to a 6.2% y/y consensus forecast. The January reading was only fractionally lower than the 6.5% y/y growth seen in December. Core CPI – which strips out volatile food and fuel costs – fell to 5.6% y/y in January from 5.7% in December. On a m/m basis headline CPI saw its biggest climb in 3 months, rising 0.5% on the month, driven by the cost of shelter and energy prices, up from 0.1% m/m growth in December. While both the headline and core measures continued to trend lower on a year-on-year basis, the slowing pace of deceleration, is likely to add to the Fed’s narrative of needing further hikes in coming months. Comments made by several Fed officials shortly after the data release suggested that they saw the possibility of rates needing to rise above 5% to ensure inflation returns to the 2% target range.

Preliminary estimates suggest that Abu Dhabi’s economy grew 10.5% y/y in real terms in the first 9 months of 2022. Over this period real GDP in non-oil sectors grew 10.3% y/y and accounted for 50.3% of total economic activity. The real estate sector recorded particularly strong real y/y growth in Q3, increasing 22.9%. On a q/q basis Q3 real GDP rose by 1.1% in the Emirate.

UK Labour market data for December and January continues to point towards tight conditions, adding weight to the view that the BoE will need to raise rates further at their March meeting.  In the 3 months to December employment rose by 74K, higher than the 43K rise that had been expected. January also saw a rise of 102K pay-rolled employees, which was again significantly larger than consensus expectations for a 15K rise. Wage growth remained strong with y/y regular wage growth (excluding bonuses) increasing to 6.7% in the 3 months to December from 6.5% y/y in November. Although still robust, once bonuses are included there does appear to be slightly more of a moderation, coming in at 5.9% y/y in the 3 months to December, from 6.5% y/y in November. There was a slight fall in vacancies in the 3 months to January, although at just over a million they remain well above pre-pandemic averages.

Today’s Economic Events and Data

• 11:00 UK CPI Jan: Forecast 10.3% y/y
• 17:30 US Empire Manufacturing Survey: Forecast -18
• 18:15 US Industrial Production: Forecast 0.5% m/m

Fixed Income

• The hotter than expected US inflation print for January helped to propel US Treasury yields higher as markets continue to recalibrate rate hike expectations. Yields on the 2yr UST initially dropped on release of the CPI data but then rocketed higher, closing at 4.6154%, a gain of nearly 10bps on the day. On the 10yr UST, yields likewise dropped initially before moving higher and closing at 3.7435%, up 4bps.
• The inflation print was accompanied by several Fed speakers pushing for higher terminal rates with John Williams of the New York Fed saying that rates at 5-5.5% by the end of 2023 would be “appropriate framing.” His counterparts from the Dallas and Philadelphia Federal Reserve Banks, Lorie Logan and Patrick Harker, both seemed to support extending rate hikes.
• European bonds had been moving weaker ahead of the US CPI but yields got a boost in response as well. Yields on the 10yr bund added 6bps to 2.431% while the 10yr gilt yield added 12bps to 3.515%. Emerging market bonds closed with a general downward bias though South African 10yrs managed to see yields drop 4bps to 10.925% whereas Turkish 10yr yields added 18bps to 11.21%.

FX

• Currency markets largely looked past the release of the US CPI report with initial moves stronger against the US dollar unwound quickly. EURUSD closed the day up 0.1% at 1.0738 while GBPUSD added 0.3% to 1.2173. USDJPY moved against the yen, however, adding 0.5% to 133.16.
• In commodity currencies, AUDUSD was the standout gainer with a rise of 0.3% to 0.6986 while USDCAD moved against the loonie, up marginally to 1.3337. NZDUSD fell by 0.3% to 0.6338.

Equities

• The hotter-than-expected CPI print yesterday, and the hawkish comments from FOMC members that followed, nevertheless had a mixed effect on US equities yesterday. While the Dow Jones lost 0.5%, the S&P 500 closed flat and the interest rate sensitive NASDAQ actually gained 0.6%, suggesting markets are focusing on the ongoing y/y disinflation and the prospect that rates might soon peak, even if the pace of slowing price growth has been slower than hoped for.
• There was little concrete movement in Europe ahead of the US CPI data: in Germany the DAX lost 0.1%, while France’s CAC and the UK’s FTSE 100 both added 0.1%.
• Locally, the ADX added 0.1% while the DFM closed down 0.3%. Saudi Arabia’s Tadawul lost 0.2% and Egypt’s EGX 30 closed up 1.3%. Turkey’s Bist remained closed yesterday but could reopen today.

Commodities

• Oil prices fell overnight as markets reprice interest rate expectations and in response to large stockbuild data from the API. Brent futures fell 1.2% to USD 85.58/b while WTI edged back below USD 80/b, closing at USD 79.06/b for a loss of 1.4%. The API reported a build in crude inventories of 10.5m bbl last week along with smaller increases in gasoline and distillate stockpiles.
• OPEC forecasts a tighter oil market than it had previously as it revised up its demand growth expectations for the year while also cutting its forecast for non-OPEC supply growth. As a consequence, the level required from OPEC to balance markets has increased.