Underlying price pressures moderating in the US

Market movers today

We get the US 5-10 years consumer inflation expectations from the University of Michigan, which the Fed follows closely. It is currently at 2.9%, which still suggests that inflation expectations are anchored.

Germany releases GDP for all of 2022 while Sweden is next in line to publish CPI inflation for December.

Today, ECB will publish the early voluntary repayment of the January option. While it is notoriously difficult to predict, our expectations are in the lower end of the estimates around EUR100bn (ECB's survey of monetary analysts has a median of EUR130bn, while Bloomberg survey is higher at EUR213bn). The number is released at 12:05 CET.

We also have three Fed speakers talking this afternoon (Kashkari, Williams and Harker). It will be interesting to hear their reflection on the outlook for inflation and Fed policy following the CPI release yesterday.

The 60 second overview

US CPI: At a first glance, US December CPI came out close to our and consensus expectations, but the details suggested underlying price pressures could be starting to moderate. Core services inflation picked up to 0.5% m/m (from 0.4%), but the uptick was driven by higher shelter and health care components, while the most wage-sensitive components showed easing price pressures. Combined with the lower average hourly earnings in the most recent jobs report, the figures ease pressure on Fed to keep hiking rates aggressively. Following the release, Fed's Harker (voter) and Barkin (non-voter) favoured slower rate hikes from here, while Bullard (non-voter) said he still prefers frontloading hikes to 'north of 5%'. While we have previously been calling for a 50bp hike in the February meeting, 25bp seems like the clear base case for now. We continue to think that easing financial conditions, less negative growth outlook and economic recovery in China create persistent inflation risks, and still think Fed will eventually hike the policy rate to 5.00-5.25% in May (prev. March). See US Labour Market Monitor, 11 January and Global Inflation Watch - Central banks welcome easing inflation, 13 January, for our latest thoughts on inflation developments.

EUR/USD rise: EUR/USD continued to tick up yesterday breaching 1.085 level and challenging our call for a stronger USD. We think a lot of optimism is now priced into the EUR (Chinese reopening, natural gas prices, outperformance in European equities) which leaves EUR/USD asymmetrically vulnerable to negative news. While we still see fundamentals driving a stronger USD, we also think that in near term it is difficult to pinpoint a trigger for a reversal. We are in the process of revising our EUR/USD forecasts but we still have a bias towards a lower cross in 6-12M time.

Russia-Ukraine: Russian President Putin's defence minister appointed a new war commander yesterday as Russia's most senior general, Chief of the General Staff Valery Gerasimov, will now also be in position to lead operations in Ukraine. Experts see his appointment as a signal of Russia's determination and commitment to a long war in Ukraine if need be. Since last week, media has been reporting that Russia could be planning a new round of mobilisation, aiming at extra 500,000 conscripts in addition to the 300,000 mobilised since October.

FI: The US CPI came broadly in line with expectations which after some initial jitters left bond yields broadly unchanged on the release. An early rally in bonds, driven by carry over from an ECB sources story, staged the 4bp lower bond yield on the day. Spreads were broadly unchanged on the day. Fed's Harker called for 25bp rate hikes going forward.

FX: Yesterday's session was all about USD weakness and a stronger JPY amid US CPI details turning out to the weak side and expectations for further Bank of Japan policy tweaks next week rising. USD/JPY has consequently broken below the 130 threshold while EUR/USD has broken above 1.08. EUR/NOK remains just north of 10.70 while EUR/SEK is trading close to the 10.30 mark ahead of Swedish inflation.

Credit: Credit markets seemed confused about how to interpret the US CPI figures. Initially, spreads sold off sharply, but they quickly recouped the losses with iTraxx Xover finishing the day 5.8bp tighter and Main 2.2bp.

Nordic macro

Sweden. We expect December's soaring electricity prices (expected to have risen by 40% m/m) to lift both CPI and CPIF to new highs at 12.0% y/y and 9.9% y/y, respectively. For comparison, the latest Riksbank forecast puts CPIF at 9.1% y/y in December. However, the Riksbank is likely more concerned about core inflation, and we forecast CPIF ex energy at 8.2% vs the Riksbank's 8.3%, in our view marking the peak in core inflation. Looking at the latest inflation prints of our Nordic neighbours, there might be some downside risk to our estimate stemming from food prices, which declined in both Denmark and Norway (our forecast entail rising food prices).