August 1, 2022

“The Bank of England is expected to raise rates by 50 bps on Thursday – a 25 bps rate rise may be implemented in an effort to shield the economy, however analysts are concerned this could trigger temporary sterling weakness.”

Sam Cornford, Partner – Head of Trading

Main Headlines

Two closely watched inflation reports showed little relief from record-setting price pressures in the US, underscoring the urgency of the Federal Reserve’s historically fast campaign to cool down the economy. The latest employment cost index (ECI) report, which tracks wages and benefits paid out by US employers, showed total pay for civilian workers during the second quarter increased 1.3%. That was roughly in line with the 1.4% jump during the first three months of 2022, which was the biggest quarterly increase recorded in data stretching back to 2004. For the 12-month period that ended in June, pay-related expenses rose 5.1%, well above the 4.5% annual pace recorded last quarter. Wages increased 5.3% compared with the same time last year, after registering a 1.4% quarterly rise. Consumer sentiment remains near record lows, according to data released on Friday by the University of Michigan and expectations of future inflation five years from now came in at 2.9%.

Bank of England policymakers will be under pressure to step up the pace of monetary tightening when they meet this week, following the lead set by the European Central Bank and US Federal Reserve. Andrew Bailey, the BoE governor, has made it clear that while a 0.5% increase in interest rates is “not locked in”, it will be “among the choices on the table” when the monetary policy committee (MPC) makes its policy decision on Thursday. The BoE has raised interest rates in 0.25 percentage point increments since December but pledged in June to act “forcefully” if needed in response to more persistent inflationary pressures. If the MPC follows though, raising the central bank’s benchmark rate to 1.75%, it will be the sharpest increase in borrowing costs for more than quarter of a century. Analysts say the decision will be finely balanced, as policymakers weigh relentless inflationary pressures against the rising risks of recession. But a growing number of forecasters think the balance of opinion on the MPC will swing in favour of the first 50 basis point rise since its independence.

GBP

Sterling is well bid against most major currencies overnight. Rishi Sunak sought to burnish his tax cutting credentials in the race to be the next UK prime minister with a new pledge to slash income tax in the next parliament. The former chancellor, who is facing foreign secretary Liz Truss in the Conservative party leadership contest, announced on Sunday he would cut the basic rate of income tax in 2024 from 20% to 19%, followed by further cuts to eventually reach 16% by 2029. Sunak initially resisted tax cuts in the contest, instead standing on a platform of “sound money” and tackling inflation. But, struggling to make headway against Truss, the former chancellor announced last week he would cut VAT on energy bills to ease the cost-of-living crisis. British consumer lending rose last month at its fastest since May 2019 – boosted by a big rise in credit card borrowing as households face a cost-of-living squeeze – while the number of mortgage approvals fell to the lowest since June 2020.

EUR

The euro is stronger against the dollar and weaker against sterling this morning. Germany’s manufacturing sector contracted in July for the first time in over two years, hurt by a deepening slump in new orders that darkens the outlook for Europe’s largest economy. The German economy stagnated in the second quarter, data showed on Friday, with the war in Ukraine, pandemic and supply disruptions pushing it to the edge of contraction. A survey pointed to some relief on the inflation front, with the rate of input cost inflation across the manufacturing sector cooling for the third month running to the lowest since February 2021. A ship carrying Ukrainian grain left the port of Odesa today – the first to do so as part of a deal to unblock Ukraine’s Black Sea ports. Ukraine, Russia, Turkey, and the United Nations agreed a deal to secure the safe export of grain from Ukraine’s Black Sea ports, which were blockaded after Russia invaded the country on February 24.

USD

The dollar is weaker than most major currencies in the early morning trade. China has escalated a campaign of threats and war-games to try to dissuade Nancy Pelosi from visiting Taiwan in the coming days. Beijing has publicly warned of “forceful countermeasures” to any visit, which would be the first by a US House of Representatives Speaker in 25 years and has stepped up naval and air force manoeuvres around Taiwan. Chinese officials have even suggested to US counterparts the possibility of a military response. So intense has the reaction been to the visit, which is expected to be part of a trip to Asia in the coming week, that many analysts believe Beijing and Washington are heading into a new crisis over Taiwan. Gold prices eased today due to an uptick in the US bond yields, although expectations around less-aggressive Federal Reserve rate-hike trajectory dented the dollar and kept bullion near a three-week high.

Markets

European stocks ticker higher as corporate earnings continued to deliver upside surprises while investors assessed remarks from central bankers that higher interest rates are needed to bring inflation under control. The Stoxx 600 Index rose 0.2%, led by banks, as HSBC Holdings Plc delivered better-than-estimated profits. S&P 500 contracts slipped following the best month for US stocks since November 2020, paring the annual loss in the underlying gauge to 13%. The dollar fell, while Treasury yields inched higher but at about 2.67% the 10-year rate is well down from June’s peak near 3.50%. The yen jumped for a fourth session versus the greenback. Oil retreated. The risk of a recession has cooled expectations for how sharply the Fed has to hike rates to tame inflation. That spurred a July rebound in stocks and bonds. But market jumps that ease financial conditions can imperil the goal of curbing demand to contain the cost of living, adding pressure on the central bank.

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

8:00 a.m.: Germany June retail sales
8:00 a.m.: Russia July manufacturing PMI
9:15 a.m.: Spain July manufacturing PMI
9:30 a.m.: Czech Republic July manufacturing PMI
9:45 a.m.: Italy July manufacturing PMI
9:50 a.m.: France July manufacturing PMI
9:55 a.m.: Germany July manufacturing PMI
10:00 a.m.: Euro-Area July manufacturing PMI
10:30 a.m.: UK July manufacturing PMI
11:00 a.m.: Euro-Area June employment rate
3:45 p.m.: US July manufacturing PMI
4:00 p.m.: US June construction spending, July ISM manufacturing
OPEC’s new secretary-general, Haitham Al-Ghais of Kuwait, takes office

Corporate Events

Earnings include Heineken, Activision Blizzard, Pinterest, Global Payments, ON Semiconductor, Simon Property, Williams Companies, Arista Networks, Loews, Avis, Etisalat, Erste Group Bank, Pearson

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