Key Points to Watch Out For:
- U.S. inflation report poised to dominate market sentiment as the dollar strengthens.
- China’s Q4 GDP and economic measures under close examination.
- UK CPI and GDP data to test sterling’s resilience amid fiscal concerns.
U.S. CPI Likely to Stay Elevated
The Federal Reserve made limited headway in curbing inflation throughout 2024, with most indicators ending the year slightly below their starting points. Policymakers aimed for a 2.0% inflation target but faced persistent price increases hovering around 3.0%.
November’s CPI data showed encouraging signs as inflationary pressures in housing and services began to ease. December’s CPI is projected to rise by 0.3% month-over-month, down from November’s 0.4%, according to the Cleveland Fed’s Inflation Nowcast model. Year-over-year CPI is expected to climb to 2.9% from 2.7%, while core CPI remains steady at 3.3%.
Markets remain cautious about Federal Reserve policy. Although fewer than two 25 basis point rate cuts are anticipated in 2025, a robust CPI reading could reinforce the dollar’s momentum. Conversely, softer CPI figures might trigger a greenback sell-off, reflecting the stakes of this critical report.
Retail Sales Take Center Stage
Ahead of the CPI release, attention will first turn to the December Producer Price Index (PPI), scheduled for Tuesday, January 14. Later in the week, retail sales data will be in focus on Thursday, January 16. Analysts estimate retail sales grew by 0.5% in December, marking a slight slowdown from November’s 0.7% increase but still reflecting solid consumer activity during the holiday season.
Adding to the economic calendar, key manufacturing indicators from New York and Philadelphia will be released on Wednesday and Thursday, respectively. Additionally, housing starts and building permits data are set to round out the week on Friday, January 17, providing further insights into the state of the housing market.
Chinese Growth Anticipated to Rebound in Q4
China faces contrasting challenges to the U.S., including deflationary pressures and sluggish growth. However, Beijing’s recent policy interventions are forecast to boost Q4 GDP growth to 5.1% year-on-year, up from Q3’s 4.6%.
Accompanying the GDP report on Friday, January 17, will be December’s industrial production and retail sales figures. Analysts expect Chinese authorities to adopt a positive narrative to stabilize the yuan, which has declined by 4.5% against the dollar since September.
A stronger GDP reading could uplift global equities and risk-sensitive currencies like the Australian dollar. Australian employment data, due Thursday, January 16, will also be closely monitored for market implications.
Sterling Under Pressure Amid Fiscal and Stagflation Concerns
The pound fell to its lowest level in over a year against the dollar last week, weighed down by the dollar’s strength and concerns over the UK’s fiscal health.
Stagflation fears are mounting as the UK grapples with economic stagnation and rising inflation. Labour’s victory in the July election, combined with record tax hikes and pessimistic economic rhetoric, has dented investor confidence further.
UK government bond yields have surged, with 10-year yields reaching 2008 financial crisis levels. These developments, alongside increased borrowing expectations, continue to undermine sterling’s prospects.
Conclusion
As the week unfolds, a series of critical data releases will shape the trajectory of global financial markets and investor sentiment. These reports come at a pivotal time, offering clarity on the economic conditions and policy directions of major economies. Each release provides an opportunity to assess the health of key markets, from the inflation challenges in the U.S. to the economic recovery efforts in China and the fiscal uncertainty in the UK.
This week’s data releases are set to influence market sentiment significantly:
- U.S. CPI on Wednesday will provide critical insight into the Federal Reserve’s inflation management. A stronger reading may bolster the dollar, while weaker data could raise hopes for a more accommodative monetary policy.
- UK GDP and CPI releases will offer a clearer view of the Bank of England’s policy trajectory. Stable inflation and better-than-expected GDP growth could provide some relief for the pound, struggling under political and fiscal uncertainty.
- Retail Sales on Friday will gauge consumer resilience during the holiday season, a vital economic indicator. Weak figures could exacerbate concerns about the UK’s fragility, while stronger data may lift sentiment.
