Dollar a touch softer
The dollar is a touch weaker this morning, seemingly on the back of a report that the incoming Trump administration will adopt a “gradual” approach to imposing tariffs. In any case, there’s some respite for the euro and sterling, which are trading at around $1.0270 and $1.2230 against the US currency respectively (up from lows of $1.0180 and $1.21 yesterday), leaving EURGBP little changed hovering around the £0.84 level. Looking to the day ahead, producer price inflation data (for December) in the US might command more attention than usual, ahead of tomorrow’s consumer price inflation report (also for December).
UK bonds underperformed slightly yesterday, albeit led by the short-end, with 2-year yields rising by around 6bps and 10-year yields up around 4bps, while equivalent US and German yields were flat to marginally higher on the day. Yields generally are a little lower this morning in response to the Trump tariffs report. Meanwhile, equities were under pressure for much of the day, with European stocks ending lower, but the S&P 500 in the US managed to rally late in the session to close in positive territory.
ECB Chief Economist, Philip Lane, says the central back needs to “ensure that interest rates follow a middle path”, noting that “if rates fall too quickly, it will be difficult to bring services inflation under control,” but if rates “remain too high for too long…inflation could materially fall below (the 2%) target.” He adds though that the direction of travel for interest rates is “clear”.
The New York Fed’s December survey of consumers inflation expectations was something of a mixed bag. It showed inflation expectations were unchanged at 3.0 percent at the one-year-ahead horizon, increased to 3.0 percent from 2.6 percent at the three-year-ahead horizon, but declined to 2.7 percent from 2.9 percent at the five-year-ahead horizon. This follows Friday’s University of Michigan survey showing an increase in short- and medium/long-term inflation expectations this month, and is likely to be of some concern to the Fed.
As mentioned, producer price inflation data are due in the US later today, as is the small business optimism index for December (optimism soared in November on the back of Trump’s election victory), while a number of Fed and ECB members are scheduled to speak over the course of the day.