Early Morning Call: USD hits 6-month low after CPI and ahead of Fed meeting

Equity market overview

Equity markets rose overnight in the Asia-Pacific region, following US and European indices, as US consumer price inflation (CPI) eased more than expected in November to its lowest level in almost a year.

The rate of increase in the consumer price index fell to 7.1% last month year-on-year (YoY), lower than the 7.3% forecast by economists and down from 7.7% in October. US stocks initially soared after the release, as investors bet that the central bank might not have to squeeze the economy as aggressively as feared to bring inflation under control.

Today is all about the US rate decision. Markets had been pricing in a 50 basis point (bp) rise. Voting members of the Federal Reserve (Fed) have to tread carefully: the more tightening there is to come the deeper and deeper the expected recession will be.

In Japan, the Tankan Large Manufacturers Index fell in the final quarter of 2022 to its lowest level in nearly two years. The index fell to seven in December quarter from eight, worsening for the fourth straight quarter and marking the lowest level since March 2021. The market expected a reading of six.

However, the service-sector sentiment improved. The big non-manufacturers' confidence index rose to 19 from 14, hitting its highest level since December 2019. In terms of outlook, both manufacturers and non-manufacturers expect business conditions to worsen.

UK inflation

UK inflation has cooled a little in November. CPI YoY came in at 10.7% last month, down from 11.1% in October. Core CPI, this is without fuel and food prices, was also lower, coming in at 6.3%. Economists had been looking for that to be static at 6.5%.

The cost-of-living crisis is by no means over, as these numbers, despite being below forecasts, still mean that in most cases real wages in the UK are falling behind the current rise in prices.

Commodities

Oil prices yesterday posted their biggest daily gains in over a month following the release of US inflation data.

Brent rose back above $80. Brent and WTI have been paring some of these gains after the release of weekly API oil inventories.

US crude inventories rose for the first time in four weeks last week, by about 7.8 million barrels. Oil analysts expected on average a 3.6-million barrel drop.

Gasoline inventories rose by 877,000 barrels and distillate stocks were up by 3.9 million barrels.

Also yesterday, OPEC said it expected to see robust global oil demand growth in 2023. The organisation is counting on potential economic upside coming from a loosening of China's Zero-Covid policies. OPEC estimates that world oil demand will rise by 2.25 million barrels per day in 2023, or about 2.3%.

OPEC's monthly report also showed that production dropped in November after OPEC+ agreed to a two million barrel per day (bpd) reduction in its output target. Output in November fell by 744,000 bpd from October, according to the report.