Euro making small gains
The respite for the euro continued yesterday with the single currency getting back to above $1.03 to the dollar. The European currency was under sustained pressure for much of last week but has rebounded somewhat at the start of this week, now up a cent on Monday’s low of just under $1.02. There is still plenty of potential for volatility in the coming week or so with President Trump set to take office next Monday. The euro has also edged up against sterling, moving back to above 84p with the result that the GBPUSD cross is only little changed, remaining around $1.22.
It was a positive day for equites, with gains in the US and Europe. The S&P 500 moved up marginally for a second day in a row although it must be said the index has been fairly volatile from day to day since Christmas but has generally been trending down, with the index closing at 5,842 yesterday from over 6,000 on the 26th of December. The Eurostoxx gained 0.5% yesterday but the FTSE lost out, down 0.3%. In bond markets, not a whole lot of movement yesterday . German 10-year yields were up by 4bps to 2.65%, underperforming US 10-years which were up 1bps to just under 4.8% and UK ten-years which were flat at just under 4.9%. However, yields are falling on the open this morning, with UK 10-years outperforming and down by 7bps to close to 4.8% following the release of weaker than expected UK inflation.
In the US, PPI inflation came in a little softer than expected in December. The year-on-year change was 3.3%, up from 3.0% in November, but lower than the consensus forecast of 3.5% while the annual rate of core PPI was 3.5%, below the 3.8% consensus. While the headline rate of PPI or ‘wholesale’ inflation did pick up the components suggest that price pressures in food and services are more muted than thought. The PPI comes ahead of December’s consumer price index release later today and the measure used by the Fed to measure price chances, the PCE, which is due at the end of the month.
Also in the US, small business optimism index rose again in December, this time to a 6-year high of 105.1. The index had jumped in November, to 101.7 from 93.7 in October, following the election of President Trump, with firms expecting favourable business policies and less regulation from the new administration. The index showed across the board improvement last month with businesses more confident about the future condition of the economy, have higher sales expectations and more signaled their intent to expand.
The annual rate of UK CPI inflation slowed to 2.5% in December, from 2.6% in November. This is the first time since September that the annual pace of inflation has slowed from the previous month and beating the consensus expectation of inflation remaining at 2.6%. The underlying data is more positive with core inflation slowing to 3.2% from 3.5% while services inflation came in at 4.4%, from 5.0% in November, the weakest it’s been since March of 2022. The data is in line with BoE forecasts and gives them room to ease monetary policy at their stated ‘gradual’ pace while, in the short term, it may take some pressure off UK bonds where concerns about the outlook for the public finances have seen yields move higher in recent weeks.
On the agenda today, Euro Area industrial production and an estimate of full year 2024 German GDP. In the US, we get the CPI and the Fed’s latest beige book. Among a very full slate of speakers are Guindos and Villeroy from the ECB, Taylor from the BoE and Barkin, Kashkari and Williams from the Fed.