Dollar firmer post US inflation data
The upshot of yesterday’s inflation data in the US and some Euro area countries, including Germany, which were all broadly in line with expectations, is that the dollar is firmer, bond yields are lower, and stocks generally higher. In the currency markets, the dollar has strengthened to almost $1.08 to the euro and to around $1.2630 to sterling, leaving EURGBP largely unchanged at £0.8550.
There was clearly some relief in bond markets that there was no nasty surprise in the US inflation data, given the notable enough decline in yields that followed the release of the numbers, with US 10-year yields falling by around 10bps (before edging up slightly again) and German and UK yields also heading lower. In equity markets, the S&P 500 closed at a new high, on the back of a gain of around half a percent.
In the US, the annual rate of headline PCE inflation fell for a fourth straight month in January to 2.4%, its lowest level in almost three years and not far shy of the Fed’s 2% target. The core inflation rate (i.e. excluding energy and food prices) continued to run ahead of headline inflation but it too declined in January, coming in at 2.8% from 2.9% in December (and down from 4.8% in January 2023).
In comments yesterday, Fed member Daly said “it would be appropriate as inflation comes down to bring the nominal rate of interest down to make sure we’re not holding (policy) even tighter,” adding that “we want to avoid holding (interest rates) all the way to 2% (inflation), putting policy very tight and then causing an unnecessary downturn.” There wasn’t much change in market expectations for interest rates post the inflation numbers, with a first full quarter-point cut still priced for the July meeting.
The recovery in UK house prices continued in February according to Nationwide, with a 0.7% increase in the month taking the year-on-year change into positive territory – at 1.2% – for the first time since January last year. Separate data from the Bank of England yesterday showed a fourth consecutive month-on-month rise in mortgage approvals for house purchase in January.
The key economic data release today is the flash reading of Euro area inflation in February. Based on data for Germany, France, Spain and Ireland published yesterday, the headline rate of inflation is likely to have fallen further last month, with the consensus expecting a decline to 2.5% from 2.8% in January. The core rate is also seen coming down further, to 2.9% from 3.3%.
Other data due today include final manufacturing PMI readings for February in the main economies; the ISM manufacturing index and consumer confidence in the US; Euro area unemployment; and Quarterly National Accounts data for Q4 2023 in Ireland