Morning Report

July 26, 2022

“Liz Truss has pledged an immediate tax cut if she wins the race to succeed Boris Johnson as UK prime minister, however former Bank of England policymaker DeAnne Julius has warned that now is not the time for big moves in fiscal policy that would put the health of the economy at risk and fan inflation.”

Sam Cornford, Partner – Head of Trading

Main Headlines

US Treasury Secretary Janet Yellen said that although economic growth is slowing and acknowledged the possibility of a second consecutive quarter of GDP contraction, this would not necessarily signal that a recession has taken hold. Whilst this is the traditional definition of a recession, the private research group that is official arbiter of US recessions insists that jobs data and consumer spending indicate that the economy is healthy. US hiring remained robust in June, with 372,000 jobs created and the unemployment rate holding at 3.6%. It was the fourth straight month of job gains in excess of 350,000. Yellen said inflation “is way too high” and recent Federal Reserve interest rates hikes were helping to bring soaring prices back in check. Yellen, who previously served as chair of the Federal Reserve, hopes the Fed can cool the economy enough to bring down prices without triggering a broad economic downturn.

Liz Truss, foreign secretary, has proposed sweeping reforms to UK trade union laws that would guarantee minimum services during strikes and raise the threshold on the number of workers needing to take part in ballots on industrial action. Truss, the bookmakers’ favourite to be the UK’s next prime minister, pledged on Monday to introduce legislation that would implement a requirement for some provision to keep running during public sector walkouts. The proposal, part of the Conservatives’ 2019 election manifesto, has been resurrected against a backdrop of public sector workers threatening further strikes this summer over pay and working conditions. Boris Johnson’s government had insisted it would take six to 12 months for parliament to pass the legislation. But Truss pledged to enact the minimum service commitments within 30 days of entering Downing Street. The foreign secretary added that she would raise the voting participation threshold required by unions to approve walkouts by their members.


Sterling is well bid against most major currencies overnight. The UK government must immediately provide additional support to households struggling with soaring energy bills or risk further damaging the wider economy, an influential cross-party committee of MPs said on Tuesday. The Commons business, energy and industrial strategy committee said the energy crisis was “racing ahead of the government” and that the £15 billion support package it unveiled in May had been “eclipsed by the scale of the crisis”. Former finance minister Rishi Sunak said on Monday China represented the largest threat to Britain and world security this century, setting out his plans to deal with Beijing in the latest front in the battle to become prime minister. Meanwhile, British Foreign Secretary Liz Truss, the bookmakers’ favourite to succeed Prime Minister Boris Johnson in the Conservative Party leadership election, said on Monday she would crack down on Chinese-owned tech companies like TikTok if she wins.


The euro is stronger against the dollar and weaker against sterling this morning. Russia will slash gas supplies through its largest pipeline to Germany to just a fifth of capacity later this week in a move that threatens to leave the continent short of critical supplies ahead of the winter. State-owned energy group Gazprom said it would cut existing flows on the Nord Stream 1 pipeline in half to just 20% of capacity from Wednesday, having already lowered them to 40% last month. European politicians have decried Russia’s “weaponisation” of gas supplies. European Union countries are seeking to soften the bloc’s plan to require them to use less gas as Europe prepares for a winter of uncertain supplies. The European Commission proposed last week that the 27 EU member states each cut their gas use by 15% from August to March. The target would be voluntary, but the Commission could make it binding in a gas supply emergency.


The dollar is weaker than most major currencies in the early morning trade. President Joe Biden met virtually on Monday with the chief executives of Lockheed Martin Corp, Medtronic PLC, and Cummins Inc along with labour leaders as part of the administration’s push for legislation to boost the US semiconductor industry. The bill includes about $52 billion in subsidies for US semiconductor production, as well as a new, four-year 25% tax credit to encourage companies to build US semiconductor plants. The tax credit is estimated to be worth about $24 billion. Other provisions include a $1 billion grant program for “persistently distressed communities.” The United States on Monday said it had tripled annual reforestation spending to tackle a four-million-acre replanting backlog driven by intense, climate-driven wildfires. US Forest Service reforestation funding rose to over $100 million this year as part of moves to plant more than a billion trees in a decade under President Joe Biden’s infrastructure package.


Stocks wavered in a choppy session as traders braced for earnings from technology bellwethers amid the threats of a hawkish Federal Reserve, scorching inflation, and a looming economic recession. Traders turned more cautious after last week’s rally, with the S&P 500 closing slightly higher amid the lowest intraday volatility and volume of the year. The Nasdaq 100 underperformed ahead of results from the likes of Apple Inc. and Google’s parent Alphabet Inc. Ten-year US yields halted a two-day plunge. This week will be a “make-or-break” period for investors’ confidence in the power of Corporate America, said DataTrek Research’s Nicholas Colas. The economy is already feeling the pinch from repeated rate increases – with the Fed expected to deliver another jumbo hike Wednesday – and traders will get more clues on how much of that slowdown is reflected in earnings. For now, investors are expecting mostly bad news from megacaps. Inc.’s revenue is seen growing at its slowest rate in decades.

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

8:00 a.m.: Sweden June PPI
9:00 a.m.: Spain June PPI
1:30 p.m.: Turkey May house price index
2:00 p.m.: Hungary central bank rate decision
3:00 p.m.: US May FHFA house price index
4:00 p.m.: US July consumer confidence, June new home sales
EU emergency meeting on energy
US FOMC starts two-day policy meeting
IMF releases world economic outlook update


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