Morning Report

July 18, 2022

“The market last week priced in an 80% chance of the Fed implementing a full percentage point rate rise, but after pushback from various Fed officials, and inflation expectations moderating, the odds dropped sharply to 9%.”

Sam Cornford, Partner – Head of Trading

Main Headlines

A string of big rate rises by the Federal Reserve has put pressure on central banks around the world to follow suit to counter soaring inflation and the strong dollar. Financial Times report that central banks are now, more than at any other time this century, opting for large rate rises of 50 basis points or more, laying bare the challenges of tackling price pressures and higher US rates. Rises by the Fed, including its first 75 basis point increase since 1994, and fears over the health of the global economy, have bolstered the US dollar against almost all currencies. However, after an inflation report which Fed officials characterised as “uniformly bad” and “major league disappointment”, the University of Michigan’s consumer sentiment study showed consumer sentiment still near all-time lows. The inflation report led to traders ratcheting up bets on the Fed implementing a full percentage point adjustment at its meeting this month. At one point, the odds surged to well over half, but dropped sharply after the Michigan survey showed a moderation of inflation expectations and various Fed officials pushed back on the move.

A government plan to deregulate the City of London and foster a post-Brexit ‘Big Bang’ will trigger a battle this week with the Bank of England, which is seeking to defend high standards and its regulatory autonomy. A radical financial services bill, drawn up by former chancellor and Tory leadership contender Rishi Sunak, will be published on Wednesday. It will pave the way for ministers to be able to “call in” regulatory decisions made by the BoE that they do not like. Nadhim Zahawi, who succeeded Sunak as chancellor this month, will endorse Sunak’s plan for a more “growth-focused” approach to City regulation in his Mansion House speech on Tuesday. Bailey this month told MPs at the Treasury committee that he opposed any changes that would undermine the stability of financial regulation. “The independence of the regulators is important because much of our international standing depends on this,” he said.


Sterling is well bid against most major currencies overnight. All five candidates for the Tory leadership vowed to impose real-term pay cuts on millions of public sector workers as they held the second televised debate in the contest to succeed Boris Johnson as prime minister. Johnson is expected this week to accept the recommendation from various public pay bodies for an increase in salaries for state workers of close to 5%. But union leaders have already threatened strikes, warning that this is far from enough when inflation has already soared past 9%. The Treasury insists that the government will not give “inflationary” increases above the pay bodies’ recommendations. Asking prices for British homes advertised for sale this month were 9.3% higher than a year earlier, down from a 9.7% rise in June as mortgage costs rise sharply for first-time buyers. Britain’s housing market has been showing some signs of cooling after a more than 20% surge in prices since the start of the pandemic, as the cost-of-living surges and the Bank of England steadily raises interest rates.


The euro is stronger against the dollar and weaker against sterling this morning. Ukraine’s President Volodymyr Zelensky sacked the head of the country’s domestic security service and state prosecutor, citing hundreds of cases of alleged treason and collaboration with Russia, as Moscow appeared set to step up military operations. Zelensky said more than 60 officials from the SBU security service and prosecutor’s office were working against Ukraine in Russian-occupied territories, and 651 treason and collaboration cases had been opened against law enforcement officials. The refusal of Ukraine and Western powers to recognise Moscow’s control of Crimea poses a “systemic threat” for Russia and any outside attack on the region will prompt a “Judgment Day” response, former president Dmitry Medvedev said on Sunday. In the event of an attack on Crimea, Medvedev was quoted saying, “Judgment Day will come very fast and hard. It will be very difficult to hide.”


The dollar is weaker than most major currencies in the early morning trade. Expectations for US and European corporate profits have not fully adjusted to take into account the worsening economic outlook, according to a clutch of investors who warn earnings season could be a disappointment. Joe Biden on Friday urged Senate Democrats to pass a drastically slimmed-down version of his Build Back Better package after Joe Manchin signalled that he was not willing to back measures aimed at tackling climate change. The objections from Manchin threatened to sink Biden’s flagship economic and social spending package, which has been stalled for months by fierce Democratic party infighting. US president Joe Biden said he expected Saudi Arabia to take “further steps” to increase the supply of oil in the “coming weeks” following a meeting with Crown Prince Mohammed bin Salman in Jeddah. However, a Saudi official restated the kingdom’s position on production after the meeting, saying it would be decided based on demand.


European stocks and US equity futures rose, while the dollar weakened as investors scaled back bets on how aggressively the Federal Reserve will tighten policy. S&P 500 futures were up 0.7% and the Stoxx 600 added 0.7% as well. A gauge of Asian shares climbed 1.2%, boosted by a jump in Chinese technology firms. The Bloomberg Dollar Spot Index slipped 0.4%, extending a retreat from a record high. Commodities were broadly stronger. West Texas Intermediate crude traded near $99 a barrel, after US President Joe Biden’s trip to the Middle East ended without a firm commitment from Saudi Arabia to boost crude supplies. Wheat climbed after a five-day slump and copper rallied. Investors continue to be whipsawed by concerns over inflation and the potential for a US recession. Data last week showing a drop in long-term US inflation expectations eased some fears that elevated price pressures are becoming entrenched. Strong retail sales underscored a resilient economy despite monetary tightening.

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

10:00 a.m.: Italy May trade balance
10:00 a.m.: Spain May trade balance
10:00 a.m.: Turkey June central government budget balance
11:00 a.m.: BOE’s Saunders speaks
12:00 p.m.: Portugal June PPI
2:00 p.m.: Poland June Core CPI
First day of Farnborough International Airshow kicks. Through July 22.

Corporate Events

Earnings include BofA, IBM, Goldman


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