Amid a Hawkish Repricing, January CPI Inflation is in the Spotlight This Week

This week promises a livelier economic calendar – certainly more so than last week!

Asset drivers for the US will be Tuesday’s CPI inflation print, retail sales on Thursday and Friday’s consumer sentiment survey derived from the University of Michigan (UoM). Across the pond in the UK, the focus shifts to earnings and jobs numbers on Tuesday, Wednesday’s CPI inflation release and preliminary quarterly GDP data on Thursday.

Dovish Forecasts Fade – US CPI Eyed

From pricing in a 25bp cut as soon as March and approximately 155bps of easing this year to a 25bp cut now being favoured in June (39bps) and only 115bps for the year, this hawkish repricing has been underpinned on the back of robust payrolls, wage growth and resilient economic activity (the beginning of the month saw a notable beat on US NFP, revealing that the US economy added 353,000 new jobs to the economy, and the Q4 GDP advance report showed an annualised increase of 3.3%; both smashed through market consensus estimates).

It is, of course, a somewhat different landscape in the euro area and the UK where growth has largely flatlined. For the Fed to implement rate cuts close to even to what the market was initially pricing in (near-160bps), the central bank would need to see a marked drop in employment growth and GDP. And even then, six rate cuts are ambitious.

US CPI inflation is the headliner for the markets this week, making the airwaves at 1:30 pm GMT on Tuesday. According to Bloomberg’s median estimate, headline inflation is forecast to slow to 2.9% in the twelve months to January, down from 3.4% in December 2023 (note that this is an early estimate and is subject to change as more estimates filter through). The current estimate range, however, is between a high of 3.0% and 2.8%.

On the core side of things, inflation is also expected to reiterate the disinflationary position, cooling to 3.7% over the same period according to the median estimate, from 3.9% in December 2023. Any notable deviation from the estimate range is likely to move the market’s dial: a beat emphasises higher for longer and could prompt the USD to spike higher (stocks/bonds lower), while a significant miss suggests earlier cuts and, by extension, USD downside (stocks/bonds higher). For those interested in a technical view for the week ahead, the FP Markets Technical Research Team posted their view on the US Dollar Index here.

In addition to the US inflation number on Tuesday, Thursday welcomes retail sales at 1:30 pm GMT and the preliminary consumer sentiment survey on Friday out of the UoM at 3:00 pm GMT. Expectations for the former are anticipated to show a rise of 0.2% on a month-over-month basis versus December’s (2023) 0.6% release (ex-autos is also forecast to rise 0.2% from December to January [prior: 0.4%]). The latter is projected to show an increase to 80.0 in February from 79.0 in January.

UK Data

UK data kicks off on Tuesday with the latest employment and wages numbers at 7:00 am GMT. Headline earnings growth data is expected to slow to 5.7% in the three months to December 2023, down from November’s reading of 6.5%. The ex-bonus print is also forecast to cool to 6.0% over the same period, from 6.6% in November. In terms of the unemployment rate, market consensus forecasts a slight uptick to 4.0% in the three months to December 2023 from 3.9% in November.

For UK CPI data on Wednesday at 7:00 am GMT, expectations are for the headline release to see a small uptick to 4.1% on a year-on-year basis for January amid base effects, based on early Bloomberg estimates (up from 4.0% in December 2023). The current range is between 4.6% and 3.7%. On the core front for the same period, estimates expect underlying inflation to have eased to 5.0% from 5.1% in December 2023.

UK GDP data also comes out at 7:00 am GMT this week on Thursday; we will see the preliminary print for Q4, which is expected to come in flat. This follows the -0.1% release we saw for Q3. Should we see another negative print for Q4, this would result in the UK entering a technical recession.

Technical research suggests that sterling remains vulnerable to the downside, with key resistance in play as we head into the new week.

G10 FX (5-Day Change):

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