Inflation watch: UK softer-than-expected, US next

Sentiment was slightly better and the dollar was slightly lower on Tuesday on the back of a softer-than-expected PPI report from the US and on news that Donald Trump’s America First team would only ‘gradually’ increase tariffs on the rest of the world – if that’s any comfort.

Diving deeper, the US core PPI unexpectedly remained steady at the 3.5% level, and the headline PPI jumped from 3% to 3.3% - instead of 3.5% as expected. But many components that feed into the Federal Reserve’s (Fed) PCE index were mixed. Energy prices, for example, surged by 3.5% due to a 9.7% rise in gasoline, transportation and warehousing services saw increases, while food prices fell by 0.1% with fresh and dry vegetables down 14.7%, and service prices remained flat overall. As such, yesterday’s helped cooling worries but didn’t meaningfully reversed them. The US 2-year yield eased to 4.36%, while the 10-year yield flirted with the 4.80% mark for the second straight session. The US dollar eased amid rising hopes that the implementation of new Trump-era tariffs will be less dramatic than investors initially feared. The EURUSD was also boosted by a surprise rebound in Italian manufacturing last November, but the pair is seeing resistance near the 1.03 offers this morning.

All eyes are on the US CPI data due today. The headline inflation in the US is expected to have ticked higher from 2.7% to 2.9% in December, while core inflation is seen sticky near the 3.3% level. A higher-than-expected set of data could reverse yesterday’s selloff in the US dollar and weigh on treasuries and equities, while a softer-than-expected figure could help cooling the hawkish Fed expectations and let the US dollar give back field, and the treasuries and equities take a breather. Given how hawkish the Fed expectations have become, a soft-looking data could have a greater impact in terms of price action today, but in all cases, volatility will likely be on the menu. According to Citigroup, the S&P500 could move 1% up or down after the data based on the pricing of the ATM put and call options, competing with the Fed’s next rate decision.

The S&P 500 closed yesterday slightly up and above the 100-DMA, the CPI data will either keep the index above this level or send it below sustainably. Also on the menu du jour: the US bank earnings. They are expected to print a 40% growth in earnings in Q4 of last year thanks to comfortable comparison to the Q4 of the year before, robust net interest income and improved trading activity.

Elsewhere, the Eurozone countries are also releasing fresh updates to their inflation numbers today with the Eurozone aggregate figure for December due Friday, meanwhile the UK printed a set of lower-than-expected inflation figures this morning. UK’s monthly core and headline inflation ticked higher in December but they came in lower than pencilled in by analysts, while yearly figures fell for both readings, giving the Bank of England (BoE) room to provide relief to the UK’s renewed debt aches if needed.

Yesterday’s bond selloff in the UK went surprisingly well. It was the first major issuance since last week’s debt drama, and the £1bn worth 30-year bond auction was three times oversubscribed. The latter looked like it cooled the downside pressure in the gilt market but the 30-year yield rebounded, while the 10-year yield is back testing the 4.90% this morning. Rachel Reeves hasn’t yet convinced global investors that the gilt selloff is nothing meaningfully more than the global bond selloff and that her spending cuts will be enough to get the budget plans right. The market’s unwillingness to fund her spending plans are weighing on British growth outlook and on sterling beyond the global pressure on government bonds. Cable cleared the 1.22 support this morning after the CPI release and the outlook remains bearish on political uncertainties and expectations of stronger BoE support. Cable is at levels well above the Liz Truss times (when the pair had dived to 1.0350, remember). But the market reaction to Truss gives an idea on how bad things could get in a short period of time, and exacerbate the situation. Risks prevail.

Across the Channel, the new French PM Bayrou is walking on a tightrope by giving concessions on the heated pension reform and deficit target to avoid losing the divided government’s support and face the same faith than Barnier. But being the French PM today is like riding a rodeo bull... The rise of the French yields could equally be put on the back of the global debt selloff. But, infine, all comes down to the same rhetoric for most developed economies – high debt levels and slow progress (and even a U-turn) in inflation trajectory suggesting higher inflation levels in the longer run. Note, however, that yields used to be higher before the subprime crisis and the latter didn’t necessarily prevent economies from performing well. Yet the rising volatility in borrowing costs is not ideal.

One good news is that Israel and Hamas are apparently nearing a ceasefire agreement before Trump’s inauguration next week. The latter helped cooling the rally of the US crude prices into the $80pb level, as Brent crude eased below the $80pb mark. But note that some experts warn that Israel may ease pressure in Gaza to strengthen its ties with the US to increase pressure on Iran – which is a major oil exporter with around 1.6mbpd exported in October last year. As such, the geopolitical tensions remain high both on the Russian and Middle Eastern fronts. Minor support to US crude is seen near $76pb, the minor 23.6% retracement on the latest crude rally, while major supports stand near $75.40pb, the 200-DMA, and $74.30pb, the major 38.2% Fibonacci retracement on the latest selloff.