UK CPI surprises on the upside and set to move higher in 2021

Chris Scicluna

Despite firmer reopening on Wall St, Asian bourses mixed today as Biden inauguration awaited
Following Monday’s holiday, on a quiet day for macro news, Wall Street began the trading week in a positive mood yesterday, with a rally in tech stocks helping to lift the Nasdaq by 1.5% and the S&P500 by 0.8%. After rising modestly on the open, Treasury yields eventually moved a fraction lower, with the 10-year yield sitting back to around 1.09% as we write. In FX markets, the greenback weakened against most of its key counterparts, even as incoming Treasury Secretary Janet Yellen – speaking at her Senate confirmation hearing – confirmed earlier media reports that the Biden administration would not pursue a weak dollar policy. Instead, market participants appeared more interested in her comments on fiscal policy, telling sceptical Republican senators that a failure to use fiscal policy aggressively now to address the crisis would likely result in a worse fiscal outlook over the long term. On other matters, Yellen added that the administration is “prepared to use the full array of tools” to combat China’s “abusive” trade and economic practices, signalling that there will be no let-up in the US focus on China’s alleged dumping of products, trade barriers, forced technology transfer and theft of intellectual property.

Turning to the Asia-Pacific region, equity markets have been somewhat mixed today. In China, the CSI300 advanced 0.6%, erasing some of yesterday’s losses despite Yellen’s aforementioned comments. Markets also advanced solidly in Hong Kong, South Korea and Australia. By contrast, Japan’s TOPIX fell 0.3% on another day devoid of notable domestic economic data. Bond yields were mostly a touch lower across the region. Locally, attention now turns to tomorrow’s BoJ Policy Board meeting and updated Outlook Report. That said, the BoJ’s policy settings seem bound to remain unchanged, with any further tweaks more likely to occur at the March meeting when the Bank expects to complete its review of monetary policy announced last month. Similarly, a modest downward revision in the Bank’s assessment of FY20 growth prospects – despite favourable base effects introduced with the final Q3 GDP report last month – should not surprise investors given the recent imposition of new restrictions on activity to combat the spread of the pandemic. In a silver lining, growth should be revised a little higher in FY21 and FY22, in part reflecting the increased fiscal stimulus announced at the end of last year.

UK inflation surprises on the upside in December, and set to rise in 2021
Having surprised on the downside in November, UK inflation did the opposite last month, with the headline rate rising 0.3ppt to 0.6%Y/Y, to return to the average rate of the previous six months. Once again, a key driver of the volatility was prices of clothing, for which the respective inflation rate reversed roughly half of its decline the prior month, rising 1.9ppts in December to -1.8%Y/Y. In addition, higher inflation of transport services (up 3.8ppt to 7.2%Y/Y on the back of higher airfares, partly due to sampling issues) and recreation and culture (up 0.7ppt to 2.6%Y/Y) also made significant contributions. In contrast, inflation of energy was broadly stable (-8.5%Y/Y). But – as seen in the euro area – food inflation fell back sharply, dropping 0.8ppt to -1.4%Y/Y. So, core inflation rose 0.3ppt to 1.4%Y/Y, matching the average of the prior six months.

Looking ahead, the near-term outlook for UK inflation is perhaps more uncertain than usual, not least due to the impact of the extra costs faced by businesses related to Brexit as well as the intensification of the pandemic. However, while inflation might continue to move broadly sideways in Q1, it is set to take a step up in Q2 on the back of higher energy prices as well as the reversal of the VAT cut in hospitality and recreation in April. Food inflation is also likely to contribute positively. So, for some months this year, inflation will likely rise above 2.0%Y/Y. And we expect full-year inflation to come in a little above 1½%Y/Y, reducing pressure on the BoE to add extra stimulus.

Conte survives key confidence vote; euro area inflation data likely to match flash estimates
As had seemed likely after former PM Renzi suggested his party would abstain, yesterday evening’s key confidence vote in the Italian Senate saw PM Conte survive, winning 156 out of 296 votes cast. While that was short of the 161 votes required for an absolute majority, the abstentions of 16 senators allowed him a simple majority that gave the green light for the government to continue in weakened form.

More prosaically, today will also bring final euro area CPI figures for December. The flash estimates suggested that headline inflation remained unchanged at -0.3%Y/Y for a fourth month in a row, with the core CPI measure similarly unchanged at the series low of 0.2%Y/Y for a fourth month. Perhaps most notably within the detail, prices of non-energy industrial goods fell the most in any December since the introduction of the single currency to leave the respective annual inflation rate at a series low of -0.5%Y/Y – perhaps evidence of the impact of the stronger euro as well as excess global supply. With the final figures on the EU-harmonised measure matching the preliminary estimates in Germany (-0.7%Y/Y), France (0.0%Y/Y), Spain (-0.6%Y/Y) and Portugal (-0.3%Y/Y), there seems every reason to expect the final euro area numbers likewise to confirm the flash figures.

Biden inauguration the focus in the US today; NAHB housing index also due
The focus in the US today will be on the formal swearing in of Joe Biden as the 46th President, sadly not least due to the possibility of more violent protests from extremist Trump supporters. On the data front, this week’s run of housing-related data begins with the NAHB housing index for January, which last month receded somewhat from what had been a record high. With home financing conditions remaining favourable, the index will likely have remained elevated in January.

Australian consumer sentiment starts the year on a slightly softer note
After reaching a 9-year high at the end of last year, the Westpac consumer confidence index fell 4.5%M/M to 107.0 in January – still comfortably above the long-run average for the index. All components fell at least a little during the month, with the largest decline of 8.3%M/M occurring in the index measuring the year-ahead outlook for the economy – a dip that probably reflects the emergence of some small coronavirus clusters domestically and reaction to the considerably more worrying upswing in cases overseas. However, respondents’ view on the year-ahead outlook for family finances was only marginally weaker, likely reflecting both accommodative monetary policy settings and the substantial rebound in the labour market, with further evidence of the latter likely to be revealed in tomorrow’s Labour Force report for December.

China benchmark prime lending rates left unchanged in January
In China, today the PBoC announced that the 1-year and 5-year prime lending rates – which provide the respective benchmark for new loans to businesses and households – would remain at 3.85% and 4.65% respectively. This outcome was widely expected, especially following last week’s decision to maintain the Medium-term Lending Facility Rate at 2.95% and in light of both recent comments from PBoC officials and Monday’s GDP report.

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