Daily Market Outlook, February 11, 2022

Overnight Headlines

Asian stock markets are mostly down this morning following yesterday’s decline on Wall Street. Central bankers in several countries yesterday acknowledged the need for tighter monetary policy to guard against inflationary pressures but cautioned against too aggressive action. ECB President Lagarde said that if the European Central Bank acts too fast the recovery could weaken. Similarly, the Australian central bank head noted a risk for employment from raising interest rates too early. Meanwhile, reports suggest that the UK will make some new proposals to the EU to break the deadlock over post-Brexit trading arrangements in Northern Ireland.

Just released UK GDP data for December showed a smaller than expected monthly decline of 0.2%. Services output fell by -0.5% primarily due to declines in consumer facing services such as retailers and restaurants. However, both industrial production, and construction output rose, the latter up 2.0%. It seems that the negative impact from the rise in Omicron and the consequent reimposition of restrictions was much smaller than previous episodes. For Q4 as a whole GDP rose by 1.0% with the robust print for December offset by downward revisions to previous months. As most restrictions have now been lifted and the rest seem set to go in the near future the downturn is likely to prove short lived. It is not yet clear whether GDP will have fallen again in January. However, given indications of an acceleration in activity in the second half of the month any decline should to be modest and February should see a sizeable rebound. Beyond that however the outlook becomes cloudier.

The rest of today’s economics calendar is very light with no further releases scheduled for either the UK or the Eurozone. In the US, the February University of Michigan consumer sentiment indicator will provide the latest update on households’ views about economic conditions. The headline measure has fallen from its peak in the spring of last year reflecting concerns about both current and future conditions. This month’s reading may be little changed from January given ongoing uncertainty about inflation and a potential rise in interest rates. The survey also has readings about both short- and longer-term inflation expectations. There will be much interest in both from markets and the US central bank as to whether the latter, in particular, remain well anchored.

US government bond yields and the dollar both moved sharply higher yesterday after stronger than expected US inflation data boosted the case for the US Federal Reserve to raise interest rates aggressively this year. Following the news, a number of US banks raised their forecasts for 2022 rate hikes with one now saying that the Fed could raise rates seven times in 2022. Bond yields in the UK also rose in the wake of the US inflation news.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1300 (1.82BLN), 1.1340-50 (610M), 1.1400 (506M)1.1475 (590M), 1.1495-05 (2.93BLN), 1.1550 (1.0BLN) 1.1600 (609M)
USD/JPY: 113.40-50 (650M), 113.65 (200M), 114.50 (347M) 115.75 (750M). GBP/USD: 1.3425-30 (288M)
EUR/GBP: 0.8410-15 (400M), 0.8425 (310M), 0.8500-10 (713M)
USD/CHF: 0.9190 (280M). AUD/USD: 0.7180 (344M)
USD/CAD: 1.2570-75 (545M), 1.2600-10 (480M), 1.2635 (256M) 1.2650-60 (4.7BLN), 1.2665-75 (1.0BLN), 1.2680-90 (1.7BLN) 1.2695-00 (655M), 1.2710 (292M), 1.2725-30 (510M) 1.2795-00 (740M), 1.2810-15 (500M)
USD/ZAR: 14.6850 (380M)