In December, the United Kingdom experienced a slight increase in both monthly core and headline inflation figures. Despite this uptick, the annual data showed a decline, providing the Bank of England (BoE) with potential leeway to address the country's renewed debt challenges if necessary. Across the Atlantic, the United States is also grappling with inflationary pressures, as the Federal Reserve's PCE index presents a mixed picture. This development, coupled with shifts in crude oil prices and market reactions, paints a complex picture of economic conditions in both regions. Meanwhile, global markets are closely watching the evolving situation, with implications for currency movements and equity market performances.
The UK's inflation figures for December revealed a nuanced economic landscape. While monthly inflation indices climbed higher, the year-on-year (YoY) Consumer Price Index (CPI) inflation dropped to 2.5%, below the anticipated 2.7%. This decline in annual inflation could offer the BoE some flexibility to alleviate the UK's mounting debt concerns should it become necessary. However, market reactions reminiscent of those during Liz Truss's brief tenure as Prime Minister serve as a cautionary tale of how quickly economic conditions can deteriorate.
In terms of crude oil, minor support for US crude prices is observed near $76 per barrel (pb), aligning with the 23.6% retracement from the latest crude rally. More significant support levels are noted at $75.40 pb, coinciding with the 200-day moving average (DMA), and $74.30 pb, marking the 38.2% Fibonacci retracement from the most recent selloff. These technical levels suggest potential areas where crude prices could stabilize amidst ongoing market fluctuations.
Turning to the US, the Federal Reserve's Personal Consumption Expenditures (PCE) index showed mixed signals regarding inflation trends. Some components of the index indicated a cooling effect on the gilt market, reflecting broader economic complexities. Notably, the 30-year yield saw a rebound, while the 10-year yield is once again testing the 4.90% mark this morning. This yield movement underscores investor uncertainty as they balance inflation expectations with forthcoming monetary policy decisions.
The US dollar experienced an easing trend amid rising hopes that new tariffs from the Trump era might be less severe than initially feared by investors. This sentiment shift contributed to currency dynamics, with GBP/USD extending its recovery above 1.2200 during the European session on Wednesday. Similarly, EUR/USD was buoyed by an unexpected rebound in Italian manufacturing last November, although resistance is noted near the 1.03 offers this morning.
US bank earnings are projected to demonstrate a robust 40% growth in Q4 of last year compared to the previous year. This surge is attributed to favorable comparisons with Q4 of the prior year, strong net interest income, and enhanced trading activity. Such financial performance underscores resilience in the banking sector despite broader economic uncertainties.
In terms of inflation expectations in the US, headline inflation is anticipated to have increased from 2.7% to 2.9% in December. Meanwhile, core CPI inflation, which excludes more volatile food and energy categories, is projected to hold steady at 3.3% from a year earlier. These figures provide insight into the persistent nature of inflationary pressures within the US economy.
Additionally, market participants are closely monitoring equity market movements. The S&P500 is poised for potential swings of up to 1% in either direction following data releases, as indicated by pricing movements in at-the-money (ATM) put and call options. This volatility competes with anticipation surrounding the Federal Reserve's next rate decision, adding another layer of complexity to market dynamics.