January 12, 2022

“We’ll find out this year whether the global economy is strong enough to get by with less support from Governments and central banks. And whether inflation is a more persistent problem rather than a by-product of COVID.”

Sam Cornford, Partner and Head of Trading

Main Headlines

The US Federal Reserve will continue to raise interest rates if inflation persists at its fastest pace in decades, according to the central bank’s chairman. Powell said the world’s largest economy “no longer needs or wants” the huge financial support it has received during the pandemic, adding that policymakers must be “humble” in the face of surging price growth. However, he admitted Tuesday that inflation represents a ‘severe threat’ to the economy and the Federal Reserve has plans in the works to raise interest rates more than expected if price rises don’t level off. The Fed under Powell has had a higher tolerance for inflation as it pursued a goal of maximum employment over the last year. The Fed chair was put on the defence by Democrats who suggested that raising rates could slow hiring and disproportionately leave lower income. Fed increases lead to higher rates on business and consumer loans, which can slow growth. Powell said he is now more concerned that rampant inflation will have devastating effects on the job market.

Boris Johnson is to face MPs later at Prime Minister’s Questions amid demands for him to say whether he attended a drinks event in the Downing Street Garden during lockdown. Johnson’s leadership faced its most serious threat yet on Tuesday after it emerged his private secretary invited over 100 people to a “bring your own booze” party at the British Prime Minister’s official residence during a coronavirus lockdown. Some Tory MPs have argued that the row, which called into question Johnson’s judgment and honesty, was potentially terminal for his post as prime minister; two polls revealed most of the public believed he should quit. Douglas Ross, leader of the Scottish Conservatives, believes that the Prime Minister has misled Parliament as he broke his own guidelines and not told the truth. He added that he must resign from his position.

GBP

Sterling is well bid against most major currencies overnight. Surging energy prices that threaten to spark a cost-of-living crisis across the country are likely to last for two years, the owner of British Gas has said. Soaring wholesale natural gas prices have ignited an energy crisis that has led to the collapse of dozens of suppliers, while household bills are expected to jump 50 percent to a record £2,000 when the price cap is lifted in April. Rishi Sunak has warned the cabinet that rising inflation rates pose a real threat to the government’s finances. The UK government is being sued over its net zero climate strategy, which lawyers argue illegally fails to include the policies needed to deliver the promised cuts in emissions. Ministers are considering allowing the use of out-of-date personal protective equipment to prevent the disposal of some of the 303m items bought by the UK government during the pandemic for almost £300m.

EUR

Euro is stronger against the pound and weaker against the dollar this morning. Talks between NATO and Russia take place in Brussels on Wednesday, amid pessimism over progress following uncompromising stands taken by Moscow and Washington over tensions in eastern Europe. Against the background of a Russian troop build-up near Ukraine, the US rebuffed a demand to halt NATO expansion and the Kremlin said it would quickly see whether it was worthwhile even to keep negotiating. Poland on Tuesday became the latest European nation to record 100,000 deaths related to COVID-19, a number that was surpassed as the country is bracing for a renewed surge of infections fuelled by the Omicron variant.

USD

The dollar is weaker than most major currencies in the early morning trade. Gold prices held steady near a one-week high on Wednesday, as traders kept an eye out for US inflation data for rate clues after less hawkish comments from the Federal Reserve chief fuelled a bullion rally in the previous session. US oil production is set to rise to a record 12.41 million barrels a day in 2023 as shale producers boost supply, the EIA said. The dollar slid to its weakest since mid-November against major peers on Wednesday, after Federal Reserve Chair Jerome Powell said it may take several months to decide on running down the central bank’s $9 trillion balance sheet. Grocery store shelves across America are wiped clean, and they’re staying empty as stores struggle to quickly restock everyday necessities. As Omicron continues to sicken workers, it’s creating staffing shortages for critical functions like transportation and logistics.

Markets

Asian stocks and US and European futures gained after Federal Reserve Chair Jerome Powell reassured investors the central bank will tackle inflation to extend the economic expansion. US futures gained, indicating a firm open for US equities after the S&P 500 halted a five-day slide and the Nasdaq 100 outperformed following Powell’s comments. Treasuries found support after a solid three-year note sale. The yield on the 10-year note held a drop, while the curve flattened. The dollar was flat, while oil prices held gains. Powell told the Senate Banking Committee that officials will not hesitate to act if needed to contain price pressures. He also said the Fed will probably start shrinking its balance sheet this year. He noted the runoff would be quicker than the last time the central bank reduced asset purchases because the economy was in a much stronger position.

Main Economic Data/ Central Banks/ Government (All Times CET)

9:00 a.m.: Czech Republic Dec. CPI
10:30 a.m.: Denmark sells bills
11:00 a.m.: Euro area Nov. industrial output
11:00 a.m.: Italy sells bills
11:00 a.m.: Norway sells bonds
11:30 a.m.: Germany sells bonds
12:00 p.m.: Ireland Dec. jobless rate
2:30 p.m.: U.S. Dec. CPI
3:15 p.m.: BOE’s Cunliffe speaks
4:30 p.m.: EIA weekly report on U.S. oil inventories

Corporate Events

Earnings include Tata Consultancy, Infosys, Wipro, Toho, PB Fintech, Shaw Communications, Jefferies, KB Home, E2open, Dustin, CropEnergies

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