US inflation accelerates again in January

• US CPI inflation exceeded expectations again in January as it accelerated to 7.5% y/y, compared to analyst consensus of 7.3%. This was half a percentage point faster than the December print, and again marked the fastest pace of price growth since early 1982. While higher energy costs were still a major contributor to this high inflation figure (1.7pp), inflation appears to be coming more entrenched as core inflation rose to 6.0%, from 5.5% in December. Prices were 0.6% higher than in December both on the core and headline measures.
• The 4.4% y/y gain in shelter and 6.4% rise in food away from home would seem to support the view that underlying pressures are mounting, potentially driven in part by labour costs, even while some of the reopening frictions and energy price pressures are set to ease over the coming months. The higher-than-expected inflation print raises the chance that the FOMC might take more aggressive action at its March rate-setting meeting than the anticipated 25bps hike, with odds on a 50bps move shortening. St Louis Fed President James Bullard has come out in support of a full percentage point of hikes by July 1.
• The CPI data follows on from the robust NFP report released last week – the stronger-than-anticipated labour market potentially contributed to the faster price growth as there were more people with more money to spend than previously believed – and in the meantime there is one more release of both CPI and NFP between now and the March FOMC. Meanwhile, in further evidence of an improving labour market as the Omicron threat recedes, the number of initial jobless claims in the US in the week to February 5 fell to 223,000, down from 239,000 the previous week and lower than consensus projections of 230,000.
• Inflationary pressures are one of the factors (alongside related supply chain issues and the Omicron variant that stifled activity at the start of the year) that has led the European Commission to cut its growth forecast for the Eurozone this year. It now projects real GDP growth of 4.0% in 2022, compared to its November projection of 4.3%. This brings its forecast into line with Bloomberg analyst consensus. Both Germany and France are forecast to grow 3.6%. ECB President Christine Lagarde cautioned against hiking rates too soon last night, citing the risk of stalling the recovery, and talking up the differences between the Eurozone and the US, which she said was ‘overheated.’
• The Reserve Bank of India kept its benchmark repo rate on hold at 4.00% yesterday, having kept rates stable for 10 consecutive meetings since August 2020. Although markets had started to anticipate a rate hike, the decision was in line with our and consensus analyst projections. Inflationary pressures remain manageable, while the bank has long espoused an accommodative monetary policy as it looks to support the growth recovery. Moreover, the bank is looking to support the similarly loose fiscal policy being pursued by the government. India is set to be a growth outperformer this year, along with China, the other major Asian EM which is also loosening policy. This is in contrast to most of the rest of the world, both EM and DM, as central banks look to curb rising inflation and ameliorate cost-of-living crises.
• Egypt’s CPI inflation rate accelerated sharply to 7.3% y/y in January, from 5.9% the previous month. This marks the fastest annual pace of growth since August 2019, with a 12.4% y/y rise in food prices contributing heavily to the headline acceleration rate. On a m/m basis, inflation was 0.9%, itself the fastest pace since October. Inflation remains well with the CBE’s 5%-9% target range, and for now we hold to the view that the CBE will keep its benchmark interest rate on hold at 8.25% at its March meeting, before implementing its first hike in Q2. However, while the real interest rate remains positive, this has narrowed to 0.95%, and a further sharp acceleration in price growth in February could prompt a sooner move by the central bank.

Today’s Economic Data and Events

• 11:00 UK GDP Q4, % q/q. Forecast: 1.1%
• 11:00 UK industrial production December, % m/m. Forecast: 0.1%
• 14:30 Russia key interest rate announcement. Forecast: 9.50%
• 19:00 US University of Michigan sentiment index, February. Forecast: 67.0

Fixed Income

• US Treasury yields spiked higher in response to the elevated January CPI print of 7.5% y/y. Yields on the 2yr UST rose 21bps to settle at 1.5786%, recovering all of the ground lost since the start of the Covid-19 pandemics. On the 10yr, yields added 17bps to 2.029%, breaking through the psychological 2% barrier that may start to attract more macro investment flows. Adding more pressure to Treasuries were comments from the St Louis Fed president that he supported rates going up by 100bps in H1, implying a 50bps hike at one of the upcoming FOMC meetings. Markets are now pricing a much stronger chance of a 50bps hike at the March meeting than they were at the start of the week.
• Other developed market bonds followed US Treasuries lower following the inflation print with yields on 2yr German bonds adding 11bps to -0.34% and the 10yr bund yield gaining 17bps to 0.281%. In the UK the front end surged by more than 25bps on the 2yr to 1.361% while the 10yr gilt yield closed up by 17bps to 1.524%.
• Emerging markets bonds generally nudged higher ahead of the US inflation print with yields on 10yr South African bonds down by 7bps to 9.587% and a drop of 24bps in Turkish 10yrs to 20.75%. Indian bonds rallied with the RBI keeping rates unchanged rather than hiking as markets had been watching for.

FX

• The US dollar whipsawed following the January inflation numbers, initially popping higher before fading those gains and then grinding upward during the remainder of the trading day. The broad DXY index closed relatively unchanged at 95.553. The price action was mirrored in EURUSD which sank on the inflation numbers before spiking higher and managing to end the day virtually unchanged. However, the single currency is falling in early trade today, down 0.2% at 1.1403. GBPUSD closed stronger at 1.3557, up 0.16% while USDJPY added 0.4% to 116.01.
• In the commodity currency space, markets were generally weaker. USDCAD added 0.39% overnight to 1.2719 while AUDUSD settled lower by 0.17% at 0.7167 and NZDUSD fell 0.16% to 0.6673.

Equities

• Asian equity markets had a fairly strong day on Thursday, closing before the US CPI report which weighed on stocks elsewhere later in the day. Following on from the RBI’s decision to hold rates, Indian equities recorded robust gains, with the Sensex and the Nifty both closing up 0.8% as the central bank prioritised growth. Elsewhere in Asia the Shanghai Composite added 0.2% while the Hang Seng and the Nikkei both closed 0.4% higher.
• Within the region, the ADX was the chief gainer, adding 1.0% on the day. The DFM closed up 0.2% and the Tadawul 0.5%, while the EGX 30 and the Borsa Istanbul lost -0.2% and -0.3% respectively.
• US equity markets closed down following the inflation data release, erasing some of the gains that had been clawed back in the previous days. The  NASDAQ, particularly vulnerable to tightening bets, was the biggest loser, dropping -2.1%, but the S&P 500 (-1.8%) and the Dow Jones (-1.5%) also closed lower.
• By contrast, the UK’s FTSE 100 closed up 0.4% to a new two-year high yesterday. Other European equity markets were more mixed, with the DAX adding just 0.1% and the CAC dropping -0.4%.

Commodities

• Oil prices closed mixed overnight with a modest drop in Brent prices, down 0.15% at USD 91.41/b while WTI futures added 0.25% to USD 89.99/b. Both contracts are nudging lower in early trading today, however. OPEC released its monthly oil report overnight and noted that it could see demand surprise on the upside to its forecasts. OPEC estimates that demand will rise by 4.2m b/d in 2022, already a stronger expectation than the IEA.
• Elsewhere markets are focused on the outcome of JCPOA negotiations and whether a deal can be reached that would allow Iranian crude to return to the market in a meaningful way.

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