The January CPI inflation report out of the US contained everything the Federal Reserve did not want to see. Upward surprises in both the headline and core indices, and a clear sense that the disinflation trend we saw throughout most of 2023 has hit a wall, with price increases running again comfortably north of 4%. Bonds worldwide fell sharply, as did risk assets, but the latter recovered most of their losses by week-end. The dollar was one of the best-performing currencies among the majors, but the rally was surprisingly subdued given the inflation news, as the greenback rose less than 1% vs all of its G10 peers.

This week will be relatively quiet in terms of macroeconomic news. Not a lot of first-tier data will hit the tape until Thursday, when the February flash PMI indices of business activity are released in the US, UK and the Eurozone. An array of Fed speakers and a key speech on inflation by ECB board member Schnabel on inflation will round out the week. More generally, after this week’s nasty surprise, traders will be more jittery around the release of any further inflation numbers or indicators worldwide.


January inflation data out of the UK went the opposite direction from that in the US, with a small downward surprise. Offering further support for Bank of England doves, the GDP report for the last quarter of 2023 confirmed that the UK entered a technical recession. Flash PMIs this Thursday should provide more timely guidance on the current state of the British economy. Markets expect the numbers to be consistent with a significant rebound in growth in the first quarter of 2024, which is probably why dips in Sterling are proving shallow and short-lived.


December industrial production in the Eurozone delivered a rare positive surprise, growing (on a work-day adjusted basis) for the first time since March of 2023 vs a year earlier. If the PMI indices out Thursday manage to surprise to the upside relative to gloomy expectations, we could see the euro forming a bottom against the US dollar. Markets are now split 50/50 between predicting a first cut at the April and June meetings of this year. We find this to be a proper balance of the possibilities at this point.


Looking back to a few weeks ago, it seems hard to believe markets were pricing in a Fed interest cut in March. Since then, the US economy has reaccelerated, and inflation has rebounded. Our favourite inflation indicator, the 3-month annualised average of the core CPI, is now solidly back above 4% and has been trending up for over six months now. For now, markets have pushed back the pricing of a full first cut all the way to June. This, too, seems like a reasonable outlook, absent further upward surprises in the inflation data.