Sterling edges up as tight labour market supports further rate hikes.

British Pound

Reuters: The British pound edged higher on Tuesday after data showed a tight labour market and accelerating pay growth, adding to the Bank of England’s inflation worries as it tries to bring prices down from multi-decade highs. Pay excluding bonuses increased by an annual 6.4% in the September-to-November period, the Office for National Statistics (ONS) said, the biggest rise since records began in 2001, excluding the COVID-19 period that was distorted by lockdowns and government support measures. The ONS said Britain’s unemployment rate held at 3.7%, close to its lowest level in almost 50 years.

“With unemployment at generational lows, the labour market remaining tight and the economy resilient, the Bank of England may be forced to raise rates a little more than people think,” said Ben Laidler, global markets strategist at eToro. “That’s one of the reasons why the pound has been well supported here,” Laidler added, also highlighting plunging gas prices and China’s reopening as reasons for the recent strength in the pound. The BoE is expected to raise rates for the tenth consecutive meeting when it meets on Feb. 2 as it attempts to further bring down inflation from the more-than-four-decade high of 11.1% reached in October last year. Money markets are fully pricing in a 25 basis points (bps)rate hike at that meeting, with a roughly 75% chance of a larger 50 bps increase, according to Refinitiv data.

By 10:25 GMT, the pound was up 0.1% against the dollar to $1.2211. Against the euro, the pound was up 0.2% at 88.54 pence, although still close to the 88.97 pence level hit on Friday, which was its lowest since September last year. The ONS’s inflation data on Wednesday is expected to be the next major trigger for the pound ahead of the BoE’s meeting next month. “Depending on the resilience of tomorrow’s release of December UK CPI data, it seems too early to dismiss the risk of another 50-basis points rate hike,” Chris Turner, ING’s global head of markets, said in a research note. The consumer price index is expected to have eased to 10.5% on an annual basis last month from 10.7% in November, according to a survey of economists polled by Reuters.

South African Rand

Reuters: The South African rand weakened on Tuesday as mining production continued to decline against a backdrop of crippling power cuts. At 15:48 GMT, the rand traded at 17.1175 against the dollar, 0.4% weaker than its previous close. South Africa’s total mining output 9.0% year on year in November compared to a revised 11.0% decrease in October, Statistics South Africa said on Tuesday. Economists polled by Reuters had predicted a year-on-year contraction of about 6.85% decrease in November.

Eskom trimmed the level of power cuts from Tuesday, but the long-term power outlook remains bleak. On the stock market, the Top-40 index ended 0.32% higher, while the broader all-share rose 0.27%. The government’s benchmark 2030 bond was almost unchanged in afternoon deals, with the yield at 9.860%.

On Wednesday, investors will be closely watching the release of November retail sales and December consumer inflation numbers.

Global Markets

Reuters: Asian shares were mixed on Wednesday while Japanese yields hugged a policy cap, with markets anxiously awaiting a pivotal Bank of Japan (BOJ) meeting that could see the world’s third largest economy shift away from decades of ultra-low interest rates. The BOJ’s official two-day meeting will end on Wednesday and speculation is rife it will make further changes to its yield curve control (YCC) policy, given that the market pushed 10-year government bond yields above the policy cap of 0.5% in the past three sessions. In early Wednesday trade, however, the 10-year yield fell to 0.485% before returning to 0.5%. Japan’s Nikkei share index meanwhile gained 0.6%. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.2%, after weak earnings from Goldman Sachs overnight dragged the Dow 1% lower. The investment bank reported a bigger-than-expected 69% drop in fourth-quarter profit.

S&P 500 futures and Nasdaq futures both dipped 0.2% on Wednesday. Overnight, the S&P 500 was 0.2% lower and the Nasdaq Composite rose 0.14%. China’s blue chips rose 0.2%, while Hong Kong’s Hang Seng Index was 0.2% lower. In a Reuters poll, 97% of economists expected the BOJ to maintain its ultra-easy policy at the meeting, although the markets have positioned for chances of adjustments. Tony Sycamore, analyst at IG Group, said foreign exchange and share markets had most likely priced in the possibility of a further tweak from the BoJ to allow yields to move 75 basis points or 100 bps on either side of the 0% policy rate. “Should the BoJ abandon YCC, things will get messy,” Sycamore said. “It would see the JPY explode higher along with JGB yields. Global yields would also increase due to a possible acceleration of Japanese investors’ unhedged foreign bond portfolios.”

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“Overall, the Nikkei would be poleaxed, and global equity markets would also weaken.” Just a month ago the BOJ shocked markets by doubling the allowable band for the 10-year JGB yield to 50 basis points either side of 0%. The change emboldened speculators to test the BOJ’s resolve. Mizuho Bank said the BOJ adjusting YCC or pushing interest rates above zero was just a matter of time and execution, given the pressures arising from its divergence from monetary policy elsewhere. A survey of global fund managers by BofA Securities out on Tuesday showed that expectations of further appreciation in the Japanese yen in January were the highest in 16 years. In the currency market, the yen eased 0.6% to 128.96 per dollar on Wednesday but was still not too far from Monday’s seven-month high of 127.21 per dollar.

The U.S. dollar index hovered at 102.5, just a touch above its seven-month low of 101.77 hit on Monday. It has been undermined by falling U.S. bond yields as markets wager the Federal Reserve can be less aggressive in hiking rates. Longer-dated Treasury yields edged higher for the third straight session. The yield on benchmark 10-year Treasury notes rose slightly to 3.5402% from its U.S. close of 3.535%, partly in anticipation of the BOJ tweaking its policy. The two-year yield, which rises with traders’ expectations of higher Fed fund rates, touched 4.2005%, compared with a U.S. close of 4.192%. In the oil market, prices jumped on hopes of Chinese demand rebounding. Brent crude futures rose 0.7% to $86.5 while U.S. West Texas Intermediate (WTI) crude settled up 0.8%, at $80.83.

At the World Economic Forum in Davos on Tuesday, German Chancellor Olaf Scholz said he was convinced Europe’s largest economy would not fall into a recession. China’s Vice Premier Liu He also welcomed foreign investment and declared his country open to the world after three years of pandemic isolation. Data on Tuesday showed China’s economic growth had slumped in 2022 to the weakest rate in nearly half a century. Spot gold was largely unchanged at $1908.49 per ounce.

Written by The Mercury Team

This article was originally published by Mercury