Weak US markets
US stocks, bonds and the dollar all fell yesterday in response to Trump’s latest tariff threat (US markets were closed Monday), a mini rerun of the ‘sell America’ trade that followed his infamous reciprocal tariffs announcement last April, though some of the fall in bond prices (rise in bond yields) probably reflected a spillover from the sharp sell-off in Japan’s bond market. Some relative calm has returned to the latter overnight with yields falling back a bit. In FX, the euro strengthened across the board yesterday, gaining around 0.7% against the dollar, sterling and yen. Sterling edged back down from its early morning highs against the dollar to end largely unchanged on the day. EURUSD and GBPUSD are trading at around $1.1710 and $1.3440 this morning, while EURGBP is trading just north of £0.87 following yesterday’s gains.
US government bond yields backed up quite noticeably with 10-and 30-year yields rising by 7-8bps. Equivalent German yields finished off their highs, increasing by just 2bps on the day, while UK yields rose by 4-6bps. In equity markets, US stocks shed around 2% to 2.5%, with the Nasdaq leading the way lower, while European indices fell by around 1%. Japanese stocks have fallen further overnight, and European markets have opened lower again this morning (-0.7%).
Headline CPI inflation in the UK ticked up to 3.4% in December (a touch higher than expected) from 3.2% in November according to this morning’s release, which was partly due to an increase in tobacco duty announced in Rachel Reeves’ November budget. Core inflation (which excludes tobacco amongst other items) was unchanged at 3.2% last month, with an increase in services inflation to 4.5% (from 4.4%) offset by a decline in goods inflation to 1% (from 1.1%). In its December monetary policy statement, the Bank of England MPC said it expected headline inflation “to rise temporarily in December” before easing to 3% in Q1 this year, while other measures announced in the budget are expected to push it down to around 2.5% in Q2.
Looking to the day ahead, markets will continue to watch out for Greenland-related headlines coming out of the economic summit in Davos, which Trump will address today. A number of central bankers are scheduled to speak there today also, including ECB President Christine Lagarde. It’s very quiet on the economic data front with little or nothing of note scheduled for release.