January 26, 2023

Daily Report 26/01/2023

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The delayed producer prices index recorded an annual increase in input prices of 16.5% in the year to December from 19.2% previously with output prices increasing 14.7% from 17.5% previously. There was a monthly decline in input prices and, significantly output prices also declined 0.7% on the month. The data boosted optimism that underlying inflation pressures were subsiding which undermined Sterling to some extent, although the reaction was limited. There was some speculation that the Bank of England would adopt a relatively hawkish policy stance in relation to other major central banks which provided an element of Sterling protection in global terms. The UK currency, however, was hampered by weakness in equity markets.

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The German IFO business confidence index strengthened to 90.2 for January from 88.6 the previous month and in line with consensus forecasts. There was an unexpected small decline in the current conditions assessment, but this was offset by a significant improvement in the expectations index. The IFO stated that the German economy is starting the New Year with more confidence. It added that there will probably not be a recession, but GDP could shrink slightly in the first quarter of the year. ECB council member Nagel stated that interest rates need to increase further and would not be surprised if hikes continued to rise further after March. Fellow member Makhlouf stated that rates needed to increase at the February and March meetings. Gas prices retreated on Wednesday which will help underpin Euro confidence, but markets will be wary over Ukraine developments and the potential Russian reaction as US and European countries pledged to send battle tanks to Ukraine.

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The Bank of Canada increased interest rates to 4.50% from 4.25% at the latest policy meeting, but also signalled that rates were now on hold amid expectations that inflation has peaked. This move for a pause in rates also generated fresh speculation that the Federal Reserve could adopt a similar position at next week’s meeting. The Fed will remain in the blackout period ahead of next week’s policy meeting, but markets will be on alert for any unofficial briefings from the central bank, especially after the Bank of Canada decision to announce a pause in interest rate hikes.

Key Data

13.30 Durable Goods Orders (Dec) Exp. 2.5% Prev. -2.1%
13.30 Gross Domestic Product Annualised (Q4) Exp. 2.6% Prev. 3.2%
13.30 Nondefense Capital Goods Orders ex Aircraft (Dec) Exp. -0.2% Prev. 0.2%