January 13, 2022

“Key measures of real-time activity in the UK economy slipped in early January. However, amid broad dollar weakness the pound advanced to a two and a half month high.”

Tim Hallinan, Trading Director

Main Headlines

With inflation running at its highest in nearly 40 years, US central bankers are coalescing around a plan to start tapping the brakes on economic growth as soon as March, with further monetary policy tightening likely as the year goes on. As of Wednesday morning, San Francisco Federal Reserve Bank President Mary Daly became the latest US central banker to set her sights on a rate hike in the next couple of months. James Bullard now sees four 2022 Fed rate hikes instead of three. He suggests that US central bank will need to move more aggressively on rate rises this year as it seeks to stem an inflation surge, amid a job market that could see the unemployment rate fall below 3% by the end of the year. With the US unemployment rate at 3.9% and consumer demand strong, Fed policymakers are now hoping they can engineer a reduction in inflation without undermining the economic recovery or financial market stability.

Foreign Secretary Liz Truss enters the latest round of post-Brexit negotiations over Northern Ireland, facing a choice between picking a fight with the European Union that would curry favour with her Conservative Party faithful or cutting a deal to avert a trade war. Truss, who took responsibility for the talks following the resignation of former Brexit chief David Frost in December, will meet European Commission Vice President Maros Sefcovic at the foreign secretary’s country residence, Chevening House, on Thursday, according to a government statement. Previously, Mr Sefcovic and former Brexit Minister Lord Frost would shuttle between Brussels and London for relatively quick Friday catchups. Then again, the Covid situation deteriorated, and their talks were downgraded to virtual chats. Nevertheless, Ms Truss, the UK’s new lead negotiator, has markedly dumped that old format, for now.

GBP

Sterling is well bid against most major currencies overnight. After hours of public silence following the Prime Minister’s apology to the House of Commons, the Chancellor said that Mr Johnson “was right to apologise” for attending a gathering on May 20, 2020. Boris Johnson is facing calls from senior Tories to stand down as prime minister after he admitted attending a drinks party during lockdown. Britain’s financial services grew for the third quarter in a row in the last three months of 2021 and at their fastest pace since mid-2017, even though COVID-19 dampened optimism, a survey of 105 firms in the sector showed. A digital pound used by consumers could harm financial stability, raise the cost of credit, and erode privacy, though a version for wholesale use in the financial sector demands greater appraisal, British lawmakers said on Thursday.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. Russia could launch a new invasion of Ukraine from the sea – a form of attack that Russian forces “constantly practice”, including in Crimea, the deputy head of the Ukrainian navy has said. After four hours of talks with Russia, NATO leaders said that they were willing to engage in serious diplomacy with Moscow over arms control and missile deployments in Europe, but they rejected outright Russian demands that the alliance stop enlargement, pull back its forces from member states bordering Russia and guarantee that Ukraine will never join. Czech lower house lawmakers suspended a marathon session to vote on a confidence motion in the new centre-right government on Thursday as opposition forces dragged the debate to 22 hours before seeking an interruption. The French Senate approved on Thursday the government’s latest measures to tackle the COVID-19 virus, including a vaccine pass.

USD

The dollar is weaker than most major currencies in the early morning trade. Top US Senate Republican Mitch McConnell on Wednesday blasted President Joe Biden’s push for a voting-rights bill, underscoring the difficulty Biden’s Democrats face in trying to steer legislation through a Congress they narrowly control. Shares of US energy companies are soaring in the early days of 2022, driven by a shift to so-called value stocks and assets that stand to benefit from the steepest inflation in nearly four decades. Blackstone Inc. is requiring US staff to get Covid-19 booster shots to work in the office, joining Wall Street firms stepping up pressure on their workforces in recent days to get jabs and take more tests. Officials across the US are again weighing how and whether to impose mask mandates as COVID-19 infections soar and the American public grows ever wearier of pandemic-related restrictions.

Markets

Most Asian stocks slipped with US and European futures Thursday after a US inflation print intensified calls for interest-rate increases as soon as March. Treasuries yields have surged this year on mounting wagers for at least three rate hikes from the Federal Reserve in 2022. Traders stuck to their bets for a rate hike in March after the inflation data. The US inflation read came after Powell vowed to contain the worst price pressures in four decades without derailing the economic recovery from the pandemic. Fed Governor Lael Brainard said tackling inflation and getting it back down to 2% while sustaining an inclusive recovery is the US central bank’s most pressing task. Shares fell in Japan and Hong Kong, where a gauge of Chinese technology stocks retreated after its biggest jump in three months. Chinese developers dropped as indebted property firms face a wave of key payments this week. The S&P 500 and the Nasdaq 100 ended higher Wednesday.

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

8:00 a.m.: Turkey Nov. industrial production
9:30 a.m.: Hungary central bank sets one-week deposit rate
9:45 a.m.: BOE’s Mann speaks
10:00 a.m.: Italy Nov. industrial production
10:00 a.m.: Norges Bank 4Q survey of bank lending
11:00 a.m.: Italy, Hungary sell bonds
11:30 a.m.: ECB’s Guindos speaks
12:00 p.m.: Czech Republic sells bills
2:30 p.m.: U.S. weekly initial jobless claims, Dec. PPI
3:30 p.m.: ECB’s Elderson speaks
4:00 p.m.: Senate hearing on Brainard nomination

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