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Good morning
US headline inflation rose 0.4%m/m in December, from 0.3%m/m in November and faster than Bloomberg consensus of 0.3%. This was mainly due to volatile energy prices, which rose 2.6%m/m, contributing 43% of the rise in headline inflation. However, contributions from other price categories had largely eased. Core goods disinflation has resumed, with used car price growth slowing to 1.2%m/m from a September peak of 2.7%m/m. Core services inflation was steady at 0.3%m/m, with shelter price inflation also at 0.3%m/m.
Notably, core inflation was 0.2%m/m in December, down from 0.3%m/m in November and less than Bloomberg consensus of 0.3%. From a year ago, the core gauge slowed to 3.2%y/y from 3.3%y/y in November. With core inflation finally easing, the Fed is likely to stay on its rate-cutting cycle. The broad US dollar index (DXY) fell 0.3% to below the 109.00-level, extending the 0.6% fall in Tuesday’s session. US 2-year yield fell 10bp while the 10-year fell about 14bp following the inflation report.
Following the weaker than expected monthly UK GDP data for November this morning (+0.1%m/m vs. +0.2% expected) the focus turns to the ECB minutes of the December meeting. Rates were cut by 25bp last December, but the tone of the press conference was less dovish than markets had anticipated. Attention will then turn back to the US for initial jobless claims data, import prices and retail sales. The latter should be lifted by firm car sales, but outside of this component, we look for signs of softness, particularly given the weakness seen in recent consumer credit numbers.
EUR/USD initially climbed well above 1.03 following the softer-than-expected CPI print. However, during the US session, the USD pared its losses, pushing EUR/USD back below the 1.03 level.
After a rough start to the year, UK markets saw some relief during yesterday's session with EUR/GBP edging lower around 0.8635-0.8640 area and UK 10Y Gilt yields dropping an impressive 15bp. UK inflation for December surprised significantly to the downside with headline at 2.5%y/y (cons: 2.6%, prior: 2.6%), core at 3.2%y/y (cons: 3.4%, prior: 3.5%) and services at 4.4%y/y (cons: 4.8%, prior: 5.0%). While the downside surprise was fairly broad-based, air fares drove a large part of the downside surprise. Services, which is by far the most important component for the BoE, came in lower than the BoE's expectation of 4.7%. Likewise, the measure of core services, which excludes volatile components such as air fares, continues to decline and shows easing momentum, which is good news for the BoE. Combined with the lower-than-expected US inflation reading this further amplified the move in both GBP FX and Gilt space. Traders remain cautiously optimistic that the sharp move lower in GBP may be overdone and many still stay strategically bearish on EUR/GBP.
The pullback in the US dollar, along with renewed market expectations for a BoJ rate hike in January, has led to USD/JPY falling as much as 1% to the 156.00-level. BoJ governor Ueda’s latest speech has revived market hopes for a January rate hike.
It’s unclear what the composition, pace, and extent of US tariff hikes but broader Asian currencies remain vulnerable. AUD/USD eased 0.2% to $0.6211 despite the substantially stronger than expected Australian labour market data for December. USD/CNY pair fell slightly, with focus turning to key Chinese Q4 GDP data due on Friday.
USD/KRW pair fell 0.1% to 1455.80 as the central bank of South Korea unexpectedly kept its policy rate unchanged at 3% this morning in a 6-1 vote. Governor Rhee said that based on growth alone, the central bank would have cut rates. Inflation at 1.9% is also close to the BoK’s 2% target. All members except Rhee kept the door open for reductions in the next couple of months. But in considering all variables including financial stability risks the BoK today decided otherwise. The hold came amid heightened political uncertainty in the country, after impeached President Yung Suk Yeol was arrested this week over a failed attempt to impose military law.
Meanwhile, IDR fell 0.3% against the US dollar following the surprise 25bp Bank of Indonesia rate cut. This would inevitably put pressure on the rupiah at a time when US yields are still elevated.
| Interest Rate Swaps | EUR | USD | GBP |
| 3Y | 2.37 | 4.12 | 4.24 |
| 5Y | 2.41 | 4.14 | 4.17 |
| 10Y | 2.51 | 4.19 | 4.20 |
