UK inflation figure to go unnoticed as investors focus on negotiations
After printing a new multi-month high on Monday, the pound sterling has stabilised gains at around $1.3785. Since the beginning of the year, the pound sterling and the single currency have been moving side by side, suggesting that the market was more focused on the Trump situation rather than the divorce between the EU and the UK. In our opinion, Brexit risks are currently underestimated and investors seemed to have forgotten that the EU has the upper hand and is currently taking a tougher stance on transition talks.
December inflation figures are due for release this morning. No major surprise is expected: the headline measure should eased to 3%y/y from 3.1% in November. The core measure, which excludes the most volatile components, is anticipated to come in at 2.6%y/y, down from 2.7%. Despite the improving inflation outlook, there is little chance that the BoE would step in any time soon as only two to three hikes are expected over the next 36 months. Therefore, we remain cautious regarding further GBP appreciation.
Is an US bond market crash a realistic scenario?
Since the recent US government bonds yield hike of last week (2-year government bond rates reaching above 2%, a 10 years high) and the market excitement that followed, coupled with possible Japanese and European central bank policy tightening, we could wonder whether we might be expecting an imminent US bond market crash in the next couple of days ! All ingredients would be there: a sudden US government bond rate hike increase, equity markets keep going up (hypothesis: the propensity of investors to take further risk for higher returns pushes bondholders to invest into equity markets), the timing of policy tightening can potentially become unpredictable.
From our perspective, Friday January 12th 2018 moves in the bond market were strongly influenced by December US core CPI growth (above expectations at 1.80%), coupled with strong monthly retail sales data (0.4%, on line with consensus) that signify faster-than-expected Fed policy tightening. Looking at the US 10-year and 2-year yields, we remain confident that as long as the yields range around the 3% and 2.50% respectively, the US bond market remains stable. We think that the US bond market conditions should rather be interpreted as positive and indicates that the US economy grows at an active pace. In any case, further rate hikes will expose the US government to higher interest rates, bearing in mind that the US government carries a national debt worth of USD 20 trillion that would remain expensive in the longer term.
