Financial market research and analysis

The UK’s consumer price inflation rose 1.8% on year to January, slightly shy of 1,9% expected, on the back of rising gas and energy prices and the soft British pound.

As a kneejerk reaction, the pound tanked to 1.2477 against the US dollar.

The rising inflationary pressures in the UK are somewhat worrisome as the inflation nearly approaches the Bank of England’s (BoE) 2% target in January. However, given the extraordinary times due to the Brexit, the BoE Governor Mark Carney had clear stated that the bank is ready to tolerate a higher than otherwise inflation and would stay as accommodative as possible during the two-year Brexit negotiation period.

On top, Mark Carney has announced last week that there may be an additional slack in the UK’s economy, which added an additional dovish flavour to the BoE statement.

Nevertheless, the BoE’s dovishness is contingent on the economic data. An unsolicited overheating in consumer prices could bring the BoE to take a premature unorthodox action. But of course, the possibility of a concrete policy action would be relevant, if the inflation further rises toward the critical 3% hurdle.

At this point in time, the solid UK inflation would simply affect the pricing of potential hawkish risks, yet would unlikely predict a tangible policy move from the Bank of England.

A clear majority of analysts already think that the BoE’s next move would be an interest rate hike. Yet in case of unsustainable rise in inflation, the BoE could well review its asset purchases target and tighten the belt without directly acting on rates.

Either way, the softer than expected inflation data could temporary revive the BoE doves, yet will likely remain insufficient to encourage a bearish reversal across the pound crosses.


US stocks on the rise, as Yellen prepares to testify

The New York trading session was all about renewed records yesterday. A former Goldman Sachs investment banker Steven Mnuchin’s appointment as the US’ new Treasury Secretary wet some investors appetite. It was yet another good day for the US stocks, which opened at all-time highs and extended their rally into the session’s close.

On Monday, the S&P500 advanced to $2331.58, as the Dow Jones hit $20441.48. The US dollar index advanced to a two-month high in New York, however pared some of gains in Asia.

The US 10-year yields rebounded lower after testing 2.45%, as some big US creditors announced to unwind their positions in their US Treasury holdings.

Today’s focus is again on the US markets, as the Federal Reserve (Fed) Chair Janet Yellen prepares to deliver her first testimony before the Senate Banking Committee in Washington DC since Donald Trump became the President of the United States.

Although the expectations for an interest rate action in March are very low, investors worldwide are curious about the Fed’s plans to navigate through a potentially ice-cold Trump era. Although the global traders sold into the US dollar and the US stock futures in the lead up to Yellen’s testimony, any Fed disillusion, meaning a slightly dovish or marginally less hawkish tone, could gather additional positive momentum and fuel the actual stock rally.

It is worth keeping in mind that investors are utterly positive on stocks, while waiting for more details regarding Trump’s crunchy and ‘phenomenal’ corporate tax cut program.

The S&P500 and the Dow Jones are set for a flat open in the US.


Faster January inflation in China was not a big surprise

The Chinese consumer prices rose 2.5% year-on-year in January, while the producer prices jumped to 6.9%y/y from 5.5% a month earlier.

The rising Chinese inflation in January was not much surprising. Although the overall reflation story has become a concern for Chinese officials since the end of 2016, January figures are heavily impacted by the seasonal effect due to the Chinese New Year, which came significant earlier this year compared to the average. Therefore, the overheating in January activity could be compensated by a correction in February, again due to a restricted economic activity during the Chinese New Year holiday period.

Shanghai’s Composite (+0.03%) and Hang Seng (-0.03%) were little changed.