Consistently robust economic data out of the United States (US), coupled with stronger than expected Consumer Price Index (CPI) numbers, pushed markets back into risk-off mode this week.
The release of the annual US inflation rate on Tuesday sparked fresh concerns, as data showed that inflation dipped only slightly to 6.4% in January from 6.5% in December and came in above market forecasts of 6.2%. While the reading is at its lowest level since October 2021, the higher-than-expected inflation print forced market participants to reassess their rate expectations for 2023. Adding fuel to the fire, the country’s retail sales data indicated a resilient consumer, providing further impetus to US Federal Reserve (Fed) hawkishness. US retail sales increased 6.4% year-on-year in January, overshooting the 5.9% increase in both December and November 2022.
Meanwhile, the number of Americans filing for unemployment benefits rose to 196,000 in the week ending 4 February, from the previous week’s nine-month low of 183,000. Despite the number falling, the latest figures still suggest a tight labour market, which could also further contribute to inflationary pressure in the world’s largest economy. In addition, US producer prices increased 0.7% month-on-month in January, their biggest jump in seven months, and higher than market forecasts of 0.4%.
In December, Fed policymakers’ median projection suggested the Central Bank’s policy rate will peak at 5.1% this year. Markets are now expecting another rate hike of 25 basis points in March, while interest rate futures markets have priced in a peak of over 5.2% in July. Fewer traders are expecting any rate cuts in 2023.
DATA IN A NUTSHELL
The unemployment rate in the United Kingdom (UK) remained unchanged at 3.7% in the three months to December of 2022, the same as in the previous period, meeting market expectations. The British Office for National Statistics said there was a record high reduction in economic inactivity during the October to December period as people moved into work. The number of people employed in the UK rose by 74,000 in the three months to December, well above forecasts of a 40,000 increase, and following a 27,000 rise in November.
The annual inflation rate in the UK fell to 10.1% in January, down from 10.5% in December and below market forecasts of 10.3%. Inflation fell for a third consecutive month, to its lowest level since September 2022. The largest downward contribution came from transport – particularly passenger transport – motor fuels, restaurants and hotels. Prices also rose at a slower pace for food and non-alcoholic beverages, clothing and footwear, and furniture, in line with traditional new year discounting. In contrast, inflation accelerated for housing and utilities, recreation and culture, health, and alcoholic beverages and tobacco.
BALANCING RATE EXPECTATIONS WITH EARNINGS
US stock futures, tracking the broader market, were flat on Thursday as investors awaited a slew of economic data from which to gauge the strength of the US economy and infer the Central Bank’s policy outlook. On the corporate side, Shopify plunged almost 10% in premarket trading after the cloud-based commerce platform reported first-quarter revenue that missed expectations. In regular trading on Wednesday, the Dow Jones rose 0.11%, and the S&P 500 gained 0.28%, while the Nasdaq Composite rallied 0.92% for its third consecutive day in the green.
London-based equities climbed for a fourth consecutive session on Thursday, with the benchmark FTSE 100 climbing above the 8,000 mark to hit a new record high, largely driven by gains in the technology, industrials, and materials sectors. Multinational energy and services company Centrica rallied more than 5% to lead the FTSE 100, saying it will extend its share buyback program by £300 million after its annual profit more than tripled. Banking giant Standard Chartered was also among the winning stocks, adding over 2%, after announcing a new $1 billion share buyback following a 28% rise in annual pretax profit.
European shares climbed to a near one-year high on Thursday, with Germany’s DAX 40 crossing the 15,600 mark for the first time since February 2022. France’s CAC 40 set its sights on its all-time high of 7,384.86, hit in January 2022. Investors welcomed a batch of corporate earnings, while shrugging off strong US retail sales data which suggested that the Fed has more room to tighten policy. Drinks maker Pernod Ricard’s first-half profit and sales beat forecasts, helped by price increases in the key Chinese and US markets. Germany lender Commerzbank’s net profit rose by a better-than-expected 12% in the fourth quarter.
Japan’s Nikkei 225 Index rose 0.71% to close at 27,696, while the broader TOPIX Index gained 0.67% to 2,001 on Thursday, undoing losses from the previous session. Japanese equities are finding support from a weakening yen that has boosted the outlook for the country’s export-heavy industries, while also making Japanese assets more appealing to foreign investors. Japanese stocks tracked Wall Street higher as the market’s bullish sentiment overshadowed strong US data and the threat of further tightening by the Fed. Automakers led the rebound, with strong gains from Toyota Motor, Nissan Motor and Subaru Corporation.
‘HIGHER RATES FOR LONGER’ NARRATIVE WEIGHS ON GOLD PRICE
West Texas Intermediate crude futures bottomed out around the $79/barrel mark on Thursday, as concerns about sluggish near-term demand, particularly in the US, prompted investors to unwind some long positions following a rally that saw prices hit a peak of almost $81/barrel on 13 February. The latest International Energy Agency (IEA) report showed that US crude inventories jumped by 16.283 million barrels to 842.973 million last week, their highest level since early October, signalling weakening demand. In addition, prices have been under pressure after the US government announced plans to release 26 million barrels of oil from strategic reserves. Worries around tight supply also eased after the IEA said it expected record March production from the seven largest US shale basins.
Gold prices steadied around $1,840 an ounce on Thursday, as the dollar took a breather while investors reassessed the outlook for US monetary policy. The metal remains near to its weakest level in over five weeks as strong US economic data bolstered expectations the Fed will need to keep pushing interest rates higher to bring down inflation. Richmond Fed President, Tom Barkin, as well as Dallas Fed President, Lorie Logan, emphasised the need for further tightening should inflation persist above the target level of 2%.
Copper, which is widely considered an economic barometer, is trading in a narrow range around $4.10/pound, nearly 5% softer than the seven-month peak of $4.30/pound seen in January. Persistent fears of a global recession have offset optimism around China’s reopening. Meanwhile, on the supply side, after road blockades prevented the delivery of raw materials, Chinese mining company MMG said its Las Bambas copper mine in Peru has now secured necessary supplies, and it is able to continue production, albeit at a reduced rate. Speculation, however, is growing that copper markets could be heading into a severe deficit amid increasingly challenging supply streams in South America.
DOLLAR INDEX SETS SIGHTS ON SIX-WEEK HIGHS
The US Dollar Index turned positive, and rose to above 104 on Thursday, following a brief pause. The greenback made its way to a six-week high after stronger-than-expected producer price inflation reinforced expectations that the Fed will need to extend its tightening cycle.
The euro continued its approach towards $1.08 this week but remains below nine-month highs of $1.10 touched earlier in the month, as investors continue to bet on a longer period of high interest rates and adjust their positions accordingly. The European Central Bank is expected to raise key policy rates by another 50 basis points in March and to deliver another 25-basis-point hike after that. The ECB deposit rate is currently at 2.5%, but the peak rate is expected to reach 3.25%. Across the Atlantic, the Fed is expected to deliver at least two more rate hikes, with a peak of around 5% to 5.25%. No cuts are expected in borrowing costs this year.
The British pound hovered around the $1.20 level, remaining below the $1.24 touched earlier in the month, after the latest CPI figures offered some relief that UK price pressures may finally be easing, resulting in increasing bets that the Bank of England will not need to pursue an increasingly aggressive policy stance and that it might move to pause hikes in March. Money markets are now pricing a 4.55% interest rate peak by September, compared to 4.69% before the CPI report.
The pound started the day trading at 1.1996/$ and 1.1236/€.
Written by Citadel Global Director, Bianca Botes
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