It’s been a busy week, with Tax Free Savings Account season if full swing. It has certainly been nice to see some solid green in the markets this week. Today it’s all about the U.S. inflation data, and we’ll get to that in a moment. Here in Canada, markets have shifted to price in greater odds of a 25bps hike for the next Bank of Canada meeting following the employment report on Friday.

Turning to the States, market action today was largely driven by U.S. CPI data; the market was expecting the pace of inflation will slow to 6.5% (our pundits at CIBC Economics pegged it at 6.3%), down from 7.1% on the back of lower gasoline prices, with the core shifting to 5.7%. Month on month, headline prices may have fallen 0.1%, but the core print accelerated +0.3%. U.S. initial jobless claims fell by 1,000 to 205,000 versus 215,000 expected. Fed research suggests that average job growth actually ran at a 300,000 per month clip last year, so not quite as strong as reported. As for politics, now that Congress has finally managed to elect a leader, it looks like the Republicans are hyper focused on impeaching Biden, which should prove to distract everyone from actually running the country.

Across the pond, European markets advanced, with the Stoxx 600 index hitting its highest level since April 2022. All sectors and major European markets are in positive territory, with bank, mining and insurance stocks leading the gainers. The latest European Central Bank bulletin shows that estimates for wage growth have picked up recently. The latest European Central Bank survey of inflation expectations reveals a sharp moderation in expectations over the next 12 months, 5.0% versus 5.4% in November. Price assumptions for three years ahead moderated to 2.9% from 3.0%. The moderation in inflation expectations supports ECB doves beginning to push for a moderation in the pace of ECB tightening. That an ECB hawk such as Holzmann pushed back against the notion of early quantitative tapering, obviates fragmentation risks.

Over in the United Kingdom, challenges continue to face the UK economy, and we’re likely to see a slew of negative UK data releases in tomorrow’s session. Expect contractions in both November GDP and industrial production, we would view the 44bps of tightening discounted for the February 2^nd MPC as excessive. We continue to look for the Bank of England to moderate tightening to 25bps at their next meeting. Terminal rates still look too high, this comes despite August implied rates correcting by around 25bps in the year to date. We see little likelihood of the BoE taking rates above 4.00%.

Asian markets finished higher, with Australia leading the gainers as banks and mining stocks rose. China’s consumer price index rose 1.8% in December from a year ago, as expected, but China’s producer price index dipped 0.7% in December from a year ago, worse than expected. Elsewhere, ahead of the lunar new year holidays, the People’s Bank of China continues to add liquidity by injecting CNY65 billion via 7-day reverse repos and CNY52 billion via 14-day reverse repos. The big about face turns from China (relaxing covid zero and easing restrictions on property developers) is an important macro story right now. In Japan, local outlets have the BoJ reviewing the side effects of its easing policies at the Jan 17th meeting. The risks are now tilting heavily towards additional steps to distance policy from Abenomics. That might not come as soon as next week, but it’s coming.

Oil prices rose supported by optimism over China's demand outlook.

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