July 25, 2022

“The Federal Reserve is set to confirm market expectations on Wednesday – raising its benchmark policy rate by 0.75 percentage points for the second consecutive month, which represents a dramatic step to curb alarmingly-high inflation.”

Tim Hallinan – Trading Director

Main Headlines

The Federal Reserve is poised to take another dramatic step this week to curb alarmingly high inflation, but the US central bank’s strategy beyond that point is less certain as it weighs a fresh peak in consumer price growth against mounting recession risks. The Federal Open Market Committee on Wednesday is set to confirm market expectations and raise its benchmark policy rate by 0.75 percentage points for the second consecutive month. That will hoist the federal funds rate to a new target range of 2.25% to 2.50%, in line with officials’ long-term estimates of a “neutral” policy setting. A series of interest rate rises is planned beyond July, but with nascent signs of consumer distress emerging and tentative forecasts that the worst of the recent inflation shocks have passed, the Fed now faces an increasingly difficult task of deciding how to recalibrate its path forward. The central bank’s decision to aggressively raise rates in quick succession stems from what it deems as an urgent need to cool down the economy and ensure that expectations of future inflation remain in check.

Rishi Sunak and Liz Truss have clashed over who would take the toughest stance on China in the battle to become Britain’s next prime minister, as the two Tory leadership contenders prepared for a crucial head-to-head television debate today. Sunak, the former chancellor, said China represented “the largest threat to Britain and the world’s security and prosperity this century” and proposed a series of measures to reduce Beijing’s influence in the UK. But allies of Truss, the foreign secretary, said Sunak had been “soft” over China and that he had, until recently, been planning to hold a UK-China economic and finance conference for the first time since 2019. Sunak said he would ban all 30 branches of the Confucius Institute in the UK, arguing that the educational and cultural organisation is used by the Chinese government to promote soft power in Britain’s universities. He also promised tougher use of new national security laws to protect UK tech start-ups from Chinese investment and a new “NATO-style” international alliance to tackle Chinese cyberthreats.

GBP

Sterling is weaker than most major currencies in the early morning trade. British opposition Labour leader Keir Starmer will set out his plan to foster economic growth today, adding his voice to a debate that has dominated the Conservative Party’s race to become the country’s next prime minister. Starmer, criticised by some in his party for not spelling out clear policies to challenge the Conservatives who are again caught up in a leadership contest, will say his emphasis on economic growth might “challenge my party’s instincts”. Starmer will say he wants to see “fair” growth which will maximise “the contribution we all make to national prosperity”, though the excerpts of the speech provided no details of the policies he would pursue to achieve that goal. The Port of Dover, Britain’s main gateway to Europe, on Friday declared a ‘critical incident’ over long delays, blaming a lack of French customs officials for causing a bottleneck as holidaymakers left for summer breaks.

EUR

The euro is stronger against sterling and weaker against the dollar this morning. Russia has claimed responsibility for a series of missile strikes that hit the key Ukrainian port of Odesa, a day after Moscow signed a deal allowing Kyiv to resume grain exports as part of efforts to alleviate a growing global food crisis. Two cruise missiles hit the port on Saturday and two others were shot down by Ukrainian air defences, according to Serhiy Bratchuk, a spokesman for Ukraine’s southern military command. China’s new Belt and Road Initiative investments in Russia have fallen to zero for the first time, signalling Beijing’s reluctance to incur sanctions in the wake of the Ukraine war. Beijing struck no deals with Russian entities under the BRI programme in the first half of 2022, according to a report by the Green Finance & Development Center at Fudan University in Shanghai reviewed by the Financial Times.

USD

The dollar is well bid against most major currencies overnight. The strong dollar has wiped billions of dollars off the second-quarter sales of US companies, prompting many to cut their guidance for the remainder of the year. The currency shock has muddled an earnings period that was being closely studied for signs of a weakening global economy, as high inflation and tighter monetary policy weigh on business and consumer demand. The list of companies stomaching multi-million or billion-dollar hits has grown by the day after the US currency surged to its highest level in 20 years. Apple and Microsoft, who generate a substantial portion of their business outside the US, release quarterly results in the coming days. China has publicly threatened “strong measures” if Pelosi proceeds with the planned visit to Taiwan in August. But one person said China had expressed “stronger opposition” to the US in private than before. Several other people familiar with the situation said the private rhetoric went even further by suggesting a possible military response.

Markets

Stocks slipped and US equity futures wavered Monday, sapped by concerns about a dimming economic outlook and possible recession. European stocks slipped after their best week since May, with energy shares leading declines as oil fell. S&P 500 and Nasdaq 100 futures struggled to stay out of the red, while China’s property shares pushed higher amid a report that officials plan a fund to support struggling developers. Treasury yields advanced, paring a sliver of last week’s drop and a dollar gauge was little changed. Investors are continuing to monitor weaker economic data as the Federal Reserve will probably have to inflict more pain on the economy to get inflation under control. Meanwhile, the European Central Bank may not be done with big increases in interest rates after surprising with an initial half-point hike last week, according to Governing Council member Martins Kazaks. The Federal Reserve policy decision this week, along with earnings from the likes of Google’s Alphabet Inc. and technology titan Apple Inc., will help to clarify the outlook for a one-month-old rebound in stocks.

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

7:00 a.m.: Finland June PPI
10:00 a.m.: German July IFO survey
11:30 a.m.: Germany to sell bills
12:00 p.m.: UK July CBI trends total orders
2:50 p.m.: France to sell bills
3:00 p.m.: Belgium July business confidence

Corporate Events

Earnings include NXP, Kuehne, Philips, Ryanair, Julius Baer, Galp Energia, Newmont

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