The UK PMI construction index edged lower to 48.2 for January from 48.8 the previous month. This was below consensus forecasts of 49.6 and the lowest reading for 32 months. New orders and employment also continued to decline for the month, but there was a rebound in business optimism to a 6-month high. There was a further net easing of cost pressures with the second-slowest rate of increase since December 2020. There was further hawkish rhetoric from Bank of England MPC member Mann who commented that the central bank needed to stay the course and that in her view the next move is still likely to be for a further hike rather than for a cut or hold in rates.
She added that there were still upside inflation risks and monetary policy needs to lean against these risks. She also considered that any pause in rates would look too much like fine tuning to be good monetary policy. In contrast, Oxford Economics stated that the UK was one of the countries most vulnerable to monetary overkill. Sterling managed to regain some ground against the Euro during the day, especially after Mann’s comments, but was unable to make any significant impression against the strong dollar.
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BoE’s Cunliffe speech
German factory orders recovered 3.2% for December following a revised 4.4% decline the previous month and stronger than consensus forecasts of a 2.0% increase, but the industrial production data was much weaker than expected. The Euro-Zone Sentix business confidence index recovered further to -8.0 for February from -17.5 previously and well above consensus forecasts of -12.9. According to Sentix, the latest increase signals that a recession is off the table for the time being. Instead, the scenario of stagnation is gaining ground. Euro-Zone retail sales declined 2.7% for December with a 2.8% annual decline. ECB council member Kazaks stated that there will be a further 50 basis-point rate hike barring a significant data shock.
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ECB’s Schnabel speech
US Treasuries posted further losses after the European open and, after a brief pause, there was further selling in early New York with the 10-year yield increasing to the highest level for close to four weeks at above 3.60%. Higher yields continued to provide important support to the dollar and, after a period of correction. The US employment trends index strengthened to 118.7 from 116.3 previously, maintaining confidence in a strong labour market, although there was also evidence of a slowdown in wage increases. Atlanta Fed President Bostic stated that interest rates may well have to increase further than expected. The dollar maintained a strong tone and extended gains to 1-month highs against the Japanese currency before a limited correction.
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President Biden speech