Daily Report 27/01/2022

The latest YouGov survey recorded an increase in the one-year inflation expectations to 4.8% from 4.0% previously which was double the long-term average and the highest reading since the survey started in 2006. The longer-term expectations index held at a 5-year high of 3.3%. The data is likely to maintain concerns within the Bank of England over the risk that expectations will move higher and increase upward pressure on wages. Sterling held a firm tone during European trading as risk appetite maintained a firmer tone. There were no substantive political developments during the day with markets waiting for the Gray report. Expectations of Bank of England rate hikes were offset by stronger expectations of Fed rate increases and the UK currency settled close to 2-month lows against the dollar on Thursday. Markets will continue to monitor political developments, although risk conditions are likely to have a more substantial currency impact.

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Narrow ranges prevailed ahead of Wednesday’s New York open with the Euro drifting lower amid Ukraine concerns and an underlying lack of yield support. The GFK Consumer Confidence Survey for February showed a slight improvement from -6.9 previously to -6.7, this was also comfortably above expectations of -7.8. The single currency remains under pressure due to the significant strengthening of the Dollar with today being a quiet day for European data releases.
 
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The US goods trade deficit widened to $101.0bn for December from $98.0bn the previous month and above consensus forecasts of $96.1bn. The growth in imports out-paced exports again and the 2021 deficit hit a record high of $1.08trn from $894bn the previous year. The Federal Reserve made no changes to interest rates with the Fed Funds rate held at 0.25%. The statement noted that the economy had continued to improve, but that the path of the economy continues to depend on the virus and risks to the outlook remain. It added that with inflation well above 2.0% and a strong labour market it would soon be appropriate to raise interest rates. The Fed will conclude asset buying by the beginning of March which reinforced expectations that there would be a rate hike at the March meeting. The dollar edged lower in an immediate reaction, although moves were limited. Chair Powell reiterated that the economy no longer needed on-going high levels of monetary support given inflation and employment developments. Powell added that there was plenty of room to raise interest rates given the strength of the labour market and he did not rule out raising rates at every meeting. He added that it was possible that the Fed could move faster than the previous tightening cycle and his rhetoric overall was notably and consistently hawkish. Powell also warned that inflation was liable to be higher than expected and the overall tone triggered significant dollar gains as markets priced in a series of rate hikes.

Key Data 

13.30 Durable Goods Orders (Dec) Exp. -0.5% Prev. 2.6%
13.30 Gross Domestic Product Annualised (Q4) Exp. 5.4% Prev. 2.3%
13.30 Nondefense Capital Goods Orders ex Aircraft (Dec) Exp. -0.1% Prev. -0.1%