US inflation remains sticky after yesterday's numbers came in higher than expected. The headline number showed inflation rose from 3.1% to 3.4% year on year, and core inflation came in at 3.9% versus a forecast of 3.8%. So, numbers were far from dovish and as a result we saw USD gain across the board. Fed Mester spoke after the number commenting on the data, suggesting March is too early to see the first rate cut by the Fed.
ECB’s Christine Lagarde commented last night, that should upcoming data suggest that inflation will drop back to its 2% target, then she feel’s confident interest rates will start to decline.
* Daily move - against G10 rates at 7:30am, 12.01.24
** Indicative rates - interbank rates at 7:30am, 12.01.24
Oil prices climbed this morning after the US and UK launched airstrikes on Houthi rebel targets in Yemen to cripple the group’s ability to attack commercial vessels in the Red Sea. Only yesterday Maersk’s CEO, Vincent Clerc, commented that disruption in the Red Sea could have ‘significant consequences’ for global growth. The implication on deflation is also a key consideration in our view, with our importing clients already reporting a rise in shipping container costs as well as delays in deliveries.
Data this morning has revealed that November GDP came in at 0.3%, up from -0.3% in October; a rise that’s consistent with the rebound in PMI numbers in the same month. However, there is still a belief amongst analysts that this rebound won’t be sufficient to defy that the UK fell in a technical recession at the end of the year – GBP moves are muted following the data.
Whilst FX markets have been quiet, this week there has been greater interest in the bond markets. International account was quite active with a continued interest in selling 5-year, 10-year, and 30-year treasuries on the thought that there are signs that the fall in inflation is stalling, and thus there are too many rate cuts priced in by the money markets. If we continue to see interest in market participants selling treasuries, then we will likely see a pick-up in demand for USD in coming weeks, subject to data points adding to the argument that deflation is indeed stalling. Producer price inflation numbers today could support this further.
Is sticky inflation going to cause the US treasury yields to rise further? Yesterday’s numbers showed a pickup in inflation, with the services portion of the numbers coming in stronger. Whilst it's not made the headlines yet, the impact of the Red Sea conflict is certainly going to have an impact on deflation expectations, with the risk of higher oil prices as well as higher costs for shipping containers. The belief that markets have priced in too many rate cuts could start to have more followers and if so, treasury yields could continue their rebound.
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