Morning Report

July 25, 2023

“Investors brace for a crucial week of data and central bank decisions, with Wall Street, FTSE 100, and European stocks declining. The FED and ECB are expected to announce a quarter percentage point hike this week.” 

 Sam Cornford – Head of Trading 


Main Headlines

The Federal Reserve is getting ready to raise interest rates again as part of its efforts to control inflation. They are expected to increase the benchmark rate by a quarter percentage point on Wednesday, bringing it to a target range between 5.25% and 5.5%. Traders in the fed funds futures markets think this will be the last increase in the current campaign against high inflation. However, economists believe the Fed won’t indicate this is the final increase because they want to have the option to tighten monetary policy further if inflation doesn’t decrease as much as anticipated in the future. 

Around 25% of the UK government debt consists of index-linked bonds, which means their payouts change with inflation, making the country stand out internationally. Italy comes next with 12% of its bonds tied to inflation, while most countries have less than 10%. This year, the UK is expected to have the highest debt interest costs among developed nations due to persistently high inflation and a large proportion of government bonds linked to price rises. The Treasury is predicted to spend £110 billion on debt interest in 2023, which would be 10.4% of total government revenue, the highest compared to other high-income countries. This is the first time the UK has ranked at the top in this data set since 1995, surpassing the previous leader, Iceland. 



Sterling is well bid against most major currencies overnight. In July, the UK’s economic activity slowed down significantly due to rising interest rates affecting consumer spending and a deepening manufacturing downturn, as revealed by a well-regarded survey. The flash UK PMI services output index, which measures activity in the sector, reached a six-month low, while the manufacturing output index hit a seven-month low, indicating contraction for most businesses. As a result, the composite index, which combines both sectors, fell to a seven-month low in June. Despite the government’s plan to boost new dwellings in England, housebuilders doubt that it will help the administration meet its manifesto target on homes. The government aims to “build at least a million more homes” before the next vote, expected in 2024, but doubts persist about reaching the separate manifesto pledge to build 300,000 new homes annually by the mid-2020s, even though some officials continue to support it. 


Euro is weaker than most major currencies in the early morning trade. Germany plans to invest around 20 billion euros ($22.15 billion) in the semiconductor industry in the coming years, the economy ministry said on Tuesday, amid growing alarm over supply chain fragility and dependence on South Korea and Taiwan for chips. The money will be drawn from the Climate and Transformation Fund from 2024 onwards, the ministry said, adding that it could only give funding for individual projects after European Commission approval. It said Taiwanese semiconductor manufacturer TSMC expressed interest in investing in a semiconductor production facility in Germany and that the ministry was in close contact with the company over an investment decision.  Yesterday, Bund yields and the euro fell due to weak PMI data, causing traders to lower bets on the ECB’s interest rate hikes. Today’s ECB bank lending survey and German IFO data might have a similar effect. The IFO business climate index is predicted to drop to its lowest since November, and the forward-looking expectations index may reach its lowest since December. While the ECB will likely raise rates by 25bps this week, doubts remain about another hike in September as initially expected by the market. Some policymakers caution against further increases. 



Dollar is stronger against Euro and weaker against Sterling this morning. Yesterday afternoon, Wall Street, the FTSE 100, and European stocks all experienced declines as investors prepared for a significant week of data, earnings reports, and central bank decisions. Tomorrow, the US Federal Reserve is set to meet, and investors are expecting a quarter percentage point hike. Similarly, on Thursday, the European Central Bank (ECB) will hold a meeting, and analysts anticipate a 25 basis point rate hike to be announced. Additionally, the Bank of Japan’s (BoJ) decision later in the week will be closely watched. On the same day, the US Federal Deposit Insurance Corporation (FDIC) issued a warning to banks, instructing them to correct financial statements that had “incorrectly” reduced uninsured deposits. These revisions came ahead of a proposed special fee, tied to the size of those deposits, which the FDIC plans to impose mainly on large firms to recover losses from the failures of banks like Silicon Valley Bank. This could result in banks owing billions of dollars. 



European stocks were muted this morning as traders geared up for earnings from some of the world’s biggest corporations and key central bank rate decisions this week. The Stoxx Europe 600 index was little changed at the open. Basic resources shares surged, with miners Anglo American Plc and Rio Tinto Plc gaining more than 3% as metal prices advanced after China’s latest stimulus pledge. Health-care stocks lagged, with Bayer AG dropping 2.5% after cutting guidance. Among other individual movers, Unilever Plc climbed as much as 5.1% after a sales beat, and French software maker Dassault Systems SE plunged after underwhelming results. 


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

10:00 a.m.: Germany July IFO Business Climate
10:00 a.m.: Euro-area Bank Lending Survey
10:00 a.m.: Poland June Unemployment
2:00 p.m.: Hungary Rate Decision
3:00 p.m.: US May FHFA House Price Index
4:00 p.m.: US July Conf. Board Consumer Confidence
IMF releases World Economic Outlook
Nigeria Rate Decision 


Corporate Events 

Earnings include LVMH, Alphabet, Microsoft, 3M, GM, Unilever, Texas Instruments, Visa, Danaher, EQT, GE HealthCare, GE, Kimberly-Clark, Raytheon, Verizon, Spotify, Snap, Chubb, EssilorLuxottica, Logitech 


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