July 15, 2022

“Fed Governor Waller yesterday reiterated his support for a 0.75 percentage point interest rate increase in July – having priced in an 80% chance of a 1 percentage point increase, investors re-evaluated the chances of a move of this magnitude to 40%.”

Tim Hallinan – Trading Director

Main Headlines

A top official at the Federal Reserve has left the door open for the US central bank to raise interest rates by a full percentage point at the end of this month if warranted by incoming data. Fed governor Christopher Waller yesterday reiterated his support for a three-quarter percentage point increase at the July gathering of the Federal Open Market Committee but indicated that he was open to a larger move. Waller’s comments come just one day after an alarming US inflation report, which showed consumer price growth had accelerated to a new 40-year high of 9.1% in June. Before Waller’s comments, investors in the futures market had priced in over an 80% chance that the Fed would deliver its first 1 percentage point interest rate increase since the central bank consistently began using the federal funds rate as its primary policy tool in the early 1990s. By end of day, those expectations were around 40%.

Emirates airline announced yesterday that it had rejected demands by London’s Heathrow Airport to cut capacity, despite being threatened with legal action and intended to continue operating its six daily flights to Britain’s busiest airport. Heathrow this week asked airlines to stop selling some tickets for summer flights, limiting the number of passengers flying from the hub to 100,000 a day to ease pressure on operations that have been unable to keep up with demand. A Heathrow spokesperson said the airport had been forced to impose restrictions after months of consultations with airlines failed to deliver a solution, citing staff shortages as the main issue. Yesterday, the British Chambers of Commerce urged the UK government to overhaul the post-Brexit list of occupational shortages, after warning that many companies were struggling to recruit workers. Companies also report that the labour crisis has led wages to rise sharply in many sectors, causing further strains on balance sheets that are already under pressure from soaring inflation.

GBP

Sterling is weaker than most major currencies in the early morning trade. Amazon.com said it would recruit 4,000 workers in Britain this year, including at fulfilment centres in Wakefield and Knowsley, taking its permanent workforce to 75,000 and making it one of the country’s top-10 private-sector employers. The company said that 56% of its new hires in its British operations teams, in the first half of the year, were previously unemployed or had joined directly from education. UK train drivers are planning a nationwide strike over pay this month, marking the first co-ordinated industrial action by them in 27 years, while other rail workers have also announced a further two days of walkouts of their own in August. Train drivers’ union Aslef said the one-day strike on 30^th July was the result of rail companies failing to make a pay offer in line with the rising cost of living. Other unions are also consulting about further walkouts. TSSA, which largely represents managers and supervisors, has balloted 10 train operators and Network Rail. It is expected to announce strike dates within days.

EUR

The euro is stronger against sterling and weaker against the dollar this morning.                 Analysts and investors are betting that the euro will continue tumbling even after it reached parity with the dollar as Europe’s economic outlook darkens and the US Federal Reserve raises rates to tackle inflation. The euro has already dropped 12% this year, leaving it to trade at roughly $1, a level not seen in two decades. A rising number of foreign currency analysts are now expecting the common currency to fall deep into the $0.90 range in coming months. Italian Prime Minister Mario Draghi remains in office, for now, after the president rejected his resignation offer yesterday. But the high-intensity political drama unfolding in Rome spells more trouble for Italy amid weakening economic performance, soaring inflation and a looming gas supply crisis. Markets were quick to react to this fresh bout of political turbulence: Italian stocks sold off yesterday, with a FTSE gauge of equities in the country sliding 3.4%.

USD

The dollar is well bid against most major currencies overnight. An independent investigation into the trading activities of senior officials at the Federal Reserve has concluded transactions made by Richard Clarida, the former vice-chair who abruptly resigned in January, and chair Jay Powell did not break the law or violate rules. However, the government watchdog with oversight of the US central bank, found that Clarida failed to report several trades in 2019 and 2020. The biggest US business lobby has intensified its battle against the Federal Trade Commission, bringing a lawsuit in a bid to force the commission to release documents about its decision-making processes. The lawsuit marks a new front in the chamber’s increasingly hostile clash with the FTC and its chair, Lina Khan, who has promised to strengthen US competition enforcement and take on big business. Since being selected to head the FTC, Khan has embarked on a radical shake-up of the agency as she looks to take on what she believes to be unfair concentrations of corporate power in multiple sectors.

Markets

Stocks closed well off session lows as comments from Federal Reserve officials brought some relief to investors worried that a more aggressive pace of rate hikes could trigger a recession. The S&P 500 almost erased a slide that topped 2% as Fed Governor Christopher Waller and Fed Bank of St. Louis President James Bullard said they would back a 75-basis-point hike in July after a hot inflation print. The tech-heavy Nasdaq 100 climbed amid gains in giants like Apple Inc. and Intel Corp. About $1.9 trillion of options are set to expire Friday, obliging investors to either roll over existing positions or start new ones. The monthly event includes $925 billion of S&P 500-linked contracts and $395 billion of derivatives across single stocks scheduled to run out, Goldman Sachs Group Inc. estimates. Treasury two-year yields fell as traders shifted their bets away from a full-point hike by the Fed this month. Markets may have gotten a little ahead of themselves in betting on a move of that magnitude, Waller said.

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

8:00 a.m.: Denmark June PPI
10:00 a.m.: Italy June CPI
10:00 a.m.: Poland June CPI
11:00 a.m.: Euro-area May trade balance
12:00 p.m.: ECB’s Rehn speaks
3:00 p.m.: Bank of Italy releases quarterly economic bulletin
7:00 p.m.: Baker Hughes US oil rig count
G-20 finance ministers, central bankers meet in Bali

Corporate Events

Earnings include Investor AB-B, Sandvik, Handelsbanken, Chemie Holding, New Amsterdam

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