Daily Report 21/01/2022

Latest data from the ONS suggested there had been a sharp dip in business activity in December, but there was evidence of a tentative rebound in the third week of January. There was also optimism that an easing of coronavirus restrictions would help underpin activity over the next few months. Sterling held a firm tone in early Europe with further support from market expectations of a February rate hike, although around 35% of analysts are not expecting an increase. The UK currency also gained traction from a stronger tone surrounding risk appetite, although the FTSE 100 index lost ground during the day.

UK consumer confidence dipped to -19 for January from -15 previously. Retail sales slumped for December with a 3.7% monthly decline compared with expectations of 0.6% with a 0.9% annual decline from 4.7% previously. There was a muted reaction as risk conditions dominated.

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The Euro was hampered to some extent by a further increase in French coronavirus cases. In comments on Thursday, ECB President Lagarde stated that the central bank has no need to act as fast as the Federal Reserve on monetary policy, although she also noted that the bank stood ready to respond if necessary. There was evidence of divisions within the ECB minutes as a number of policymakers argued that inflation was at risk of over-shooting expectations. There were also comments that a higher for longer inflation scenario cannot be ruled out and the bank must be prepared to adjust policy in either direction.

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12:30 ECB President Lagarde speech

US initial jobless claims increased sharply to 286,000 in the latest week from a revised 231,000 previously and well above consensus forecasts of 220,000. Continuing claims also increased to 1.64mn in the week from a revised 1.55mn and also above market expectations. The Philadelphia Fed manufacturing index strengthened to 23.2 for January from 15.4 previously and above consensus forecasts of 20.0.  There were slightly stronger readings for shipments and new orders while employment continued to increase, although the rate of growth slowed. The prices paid index strengthened further on the month while there was a slight easing of upward pressure on prices received. Companies overall were more confident over the outlook with pricing pressures expected to remain very strong. The Philly Fed data offered reassurance over the outlook, but there were some reservations over the labour market after the claims data.

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