February 24, 2023

Daily Report 24/02/2023

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The UK CBI retail sales index recovered strongly to 2 for February from -23 the previous month, but sales are expected to decline again in March while upward pressure on prices remained strong. There were still expectations of weak consumer spending.

Bank of England MPC member Mann stated that it was too soon to say whether the inflation risks posed by last year’s surge in inflation had eased and that there was no evidence yet in the data that a preponderance of turning points had been seen. In this context, she considers that the central bank should continue to increase interest rates. In particular, she was concerned over sticky inflation expectations and the risk that the economy would suffer the worst of both worlds with persistent high inflation and weaker activity. Sterling gained an element of support from Mann’s hawkish comments, although wider risk trends tended to dominate during the day.

The UK currency dipped to test support levels against the dollar amid a firm US currency and weaker equites. The GfK consumer confidence index improved to -38 for February from -45 with Sterling settling.

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The Euro experienced mixed fortunes in the wake of a flurry of mixed data. German inflation ticked higher, bolstering further interest rate hikes, and German business confidence climbed, allaying recession fears. However, pessimism over the Ukraine conflict worsening severely capped gains. The German IFO Business survey showed a marked improvement in business confidence over the next year, as price pressures began to ease. But as German inflation highlighted, the energy crisis and sky-high inflation continues to exert pressure on Europe’s largest economy.

Elsewhere, a gloomy market sentiment lingered amid fears of the Ukraine conflict escalating. Reports of Vladimir Putin meeting China’s top diplomat Wang Yi only added further tensions, following concerns that Beijing could provide military aid for Moscow. China and Russia appeared to reaffirm their close ties the day before the anniversary of the Ukraine invasion.

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US initial jobless claims edged lower to 192,000 in the latest week from 195,000 previously and below consensus forecasts of 200,000 while continuing claims declined to 1.65mn from 1.69mn. The data reinforced expectations that the labour market is still tight. The second-estimate for fourth-quarter of 2022 GDP growth was revised slightly lower to 2.7% from the flash reading of 2.9% with the estimate of consumer spending growth revised down to 1.4% from 2.3%. There was, however, an upward revision to the GDP prices index to 3.9% from 3.5% which helped maintain unease over inflation trends. The data triggered initial dollar buying and the US currency also secured defensive support later in the session from a renewed dip in US equities.

The latest US PCE prices index will be released on Friday and a stronger than expected reading would reinforce concerns over a more aggressive Fed policy stance.

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Core Personal Consumption Expenditures – Price Index (YoY)(Jan) Prev 4.4% Exp 4.3%