February 11, 2022

“Markets are expecting the Fed to be bold at the next meeting in March. If it fails to act as aggressively as expected the US central bank’s reputation for transparency and predictability could be at risk.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The annual rate of US inflation is rising at its fastest rate in 40 years as supply-chain disruptions and rising transportation costs show no sign of abating. A key inflation gauge, the Consumer Price Index, rose 7.5% from a year ago, the Labour Department reported Thursday, the largest increase since May of 1982. Core inflation, which strips out volatile food and energy costs, was 6%. On a monthly basis, CPI rose by 0.6 per cent from the previous month, a steeper increase than predicted by economists, as Americans paid higher prices for a wide range of goods, including food, electricity, and shelter. Some economists said the Fed may have to take a more forceful approach to cool down the economy this year, with larger and more frequent interest rate increases rather than doing so gradually. James Bullard, president of the Saint Louis Fed and a voting member of the Federal Open Market Committee, said that he would like to see 100 basis points worth of interest rate increases by July 1, and that the FOMC should even consider meeting on an unscheduled basis before March to start the tightening cycle.

Liz Truss, UK foreign secretary, is to make new proposals to break the deadlock over post-Brexit trading arrangements in Northern Ireland on Friday, saying that resolving the row with the EU was “an absolute priority.” Truss’s allies said both sides wanted to bridge their differences, although Boris Johnson, the prime minister, warned this week that Britain could still unilaterally suspend parts of the so-called Northern Ireland protocol if no deal was reached. British ministers have been drawing up fresh contingency plans in recent weeks in the event that Johnson activates the Article 16 override mechanism, possibly plunging the UK into a trade war with the EU. The “carrot and stick” approach taken by Truss is intended to intensify the pace of the talks, which both sides want to wrap up, if possible, within weeks and ahead of Northern Ireland assembly elections on May 5. Truss, who will host the talks at Lancaster House, wants to reset relations with the EU. Recently returned from Moscow, the foreign secretary has told colleagues she wants Europe to unite over the crisis in Ukraine, not descend into a trade dispute over Northern Ireland.

GBP

Sterling is stronger against euro and weaker against the dollar this morning. Senior Conservative MPs said, Prime Minister, Boris Johnson would face a vote of no confidence in his leadership if the UK prime minister was fined for breaking coronavirus restrictions. Johnson is expected to be among more than 50 people sent questionnaires by the Metropolitan Police as part of its investigation into 12 in Downing Street. Bank of England governor Andrew Bailey said the EU should allow its banks and fund managers to use UK clearing houses indefinitely. MPs have accused the UK tax authority of not doing enough to recover billions lost through error and fraud in state Covid-19 support packages and warned it risked being seen as “soft on fraud”. The House of Commons public accounts committee criticised HM Revenue & Customs saying it had an “unambitious” plan to recover an estimated £5.8bn incorrectly paid out through three business support schemes it administered over the pandemic. Meanwhile, ministers are closing in on a deal with City watchdogs to unleash what Boris Johnson has called an “investment big bang”, as the prime minister seeks to prove that post-Brexit regulatory changes can boost the economy.

EUR

Euro is weaker than most major currencies in the early morning trade. Russia and Ukraine said they had failed to reach any breakthrough in a day of talks with French and German officials aimed at ending an eight-year separatist conflict in eastern Ukraine. The lack of progress marked a setback for efforts to defuse the wider Ukraine crisis in which Russia has amassed more than 100,000 soldiers near Ukraine’s borders, raising fears of a war. Chancellor Olaf Scholz warned Russia of “serious” economic and political consequences should it ramp up military aggression toward Ukraine, while adding that Germany and its allies were ready for dialogue with Moscow and wanted peace. With Russia holding military exercises in Belarus and the Black Sea following its troop build-up near Ukraine, the stand-off has raised fears of a war in Europe, sending energy costs soaring across the continent, which relies on Russian gas supplies. Meanwhile, the European Union said on Thursday it had delivered a single letter in response to Russia’s proposals to member states on European security on behalf of the 27 foreign ministers of the bloc. Protesters against France’s vaccine mandates will use their vehicles to block roads in Paris starting today.

USD

The dollar is well bid against most major currencies overnight. The US State Department has issued a new advisory urging Americans in Ukraine to leave the country at the earliest possibility, strengthening earlier warnings that urged US citizens to “consider” such action. Hedge funds and other activist investors would have to disclose significant investments in US public companies within five days, halving the time they currently have to amass a secret stake, under new rules proposed on Thursday by the Securities and Exchange Commission. The change would force funds to reveal a stake of 5 per cent or more and to amend that disclosure more quickly if the holding changed materially. The move is part of a larger effort to shine a light on what big private investors are doing and will make it harder for activists to profit from secret stakes. The US government has urged Canada to use federal powers to ease the growing economic disruption caused by the blockade of the vital Ambassador Bridge by protesters opposed to coronavirus mandates. Meanwhile, Nevada lifts mask mandate as more US states ease Covid restrictions. The US struck a $720 million deal with Eli Lilly for supplies of an experimental drug that appears to fight omicron.

Markets

Stocks and bonds struggled Friday after a surprise jump in US inflation stoked bets on faster Federal Reserve interest-rate hikes amid febrile speculation about the monetary-policy outlook. Sovereign notes dropped in New Zealand and Australia, where the three-year yield hit the highest since 2019. The dollar rose and commodity-linked currencies slid as a gloomy mood sapped markets. Treasuries were mixed after sinking Thursday, when the two-year yield climbed the most since 2009 and the 10-year punched past 2%. Bonds were pummelled by a surprise jump in US inflation that stirred hawkish comments from St. Louis Fed Chair James Bullard. US and European equity contracts retreated along with an Asia-Pacific stock gauge. The technology-heavy Nasdaq 100 led US declines as Wall Street snapped a two-day winning run. Markets are struggling to adjust to the withdrawal of pandemic-era stimulus as officials fight inflation. The flattening Treasury yield curve suggests investors expect slowing economic growth as the Fed increases rates and reduces its balance sheet to curb price pressures. Meanwhile, European Central Bank President Christine Lagarde warned a rush to tighten monetary policy could harm the region’s economic rebound. The euro fell.

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

8:00 a.m.: Germany Jan. CPI
8:00 a.m.: U.K. 4Q GDP; Dec. industrial production; Dec. trade balance
8:00 a.m.: Turkey Dec. industrial production
8:30 a.m.: Switzerland Jan. CPI
9:00 a.m.: Hungary Jan. CPI
9:05 a.m.: ECB’s Elderson speaks
11:30 a.m.: Bank of Russia decision
2:00 p.m.: Russia Dec. trade balance
7:00 p.m.: Baker Hughes US rig count
Bloomberg Power Players Summit for leaders in the global sport business

Corporate Events

Earnings include British American Tobacco, Rosneft, Volvo Car, EMS-Chemie Holding, Investment AB Latour, Carl Zeiss Meditec

 

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