July 28, 2022

“The Federal Reserve raised its benchmark policy rate by 0.75 percentage points for the second month in a row – Fed Chair Jerome Powell announced the running commentary on plans to stamp out inflation would be discontinued, having stated in May that a 75-bps rate hike was not being considered.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The Federal Reserve has raised its benchmark policy rate by 0.75 percentage points for the second month in a row, extended a string of interest rate increases that began in March and have become the fastest pace of interest rate rises since 1981. Throughout this time, it has provided painstaking detail about its future plans to tighten monetary policy. On Wednesday, that changed, with chair Jay Powell announcing the US central bank would shy away from offering an official running commentary on its quest to stamp out soaring inflation. By tipping their hand thus far, policymakers have tried to manage investor expectations and avoid bouts of extreme market volatility. But the Fed has been burnt after giving a blow-by-blow account of its plans, only to then hurriedly change tack as inflation spiralled further out of control. After raising rates by half a percentage point in May, Powell sent a clear signal that the Fed would implement similar increases at subsequent meetings. He went so far as to say a 0.75 percentage point rate rise was “not something the committee is actively considering”.

Rishi Sunak, former chancellor, will attempt to shake-off claims his Tory leadership bid is faltering, when he makes a direct pitch to Conservative members today. Sunak was on Wednesday accused by Kwasi Kwarteng, business secretary, of being under “a lot of pressure” and “flip-flopping” on the issue of tax cuts as he tries to overtake his rival Liz Truss, the current favourite. Ballot papers will next week arrive at the homes of over 150,000 Tory members who will decide the final choice of the next Tory leader and future prime minister; a result will be announced on September 5. Kwarteng, a supporter of the foreign secretary, said Sunak’s plan to “temporarily” cut VAT on domestic fuel bills for a year this autumn, was a sign that Truss’s own call for tax cuts had won the day. Meanwhile, the Institute for Fiscal Studies think-tank was also critical of Sunak’s plan, arguing the £4.3 billion tax cut could prove “politically difficult” to reverse after a year. It said that if it became permanent it would encourage more energy use, making it harder for Britain to meet its net zero targets.

GBP

Sterling is well bid against most major currencies overnight. UK leadership candidate and foreign secretary Liz Truss said Britain must trade more with Commonwealth countries to counter China’s “grave threat to our values and way of life”. Truss has vowed to sign “fast-track” trade deals with Commonwealth states if she succeeds Boris Johnson as prime minister. Closer economic ties to the Commonwealth, an association of 56 member states, will strengthen “collective economic security” and “resist Chinese attempts to extend its influence through malign use of economics,” Truss said. Developers in west London face a potential ban on new housing projects until 2035 because the electricity grid has run out of capacity to support new homes, jeopardising house building targets in the capital. McDonald’s will increase the price of its cheeseburger by 20% in Britain, in the first price hike for the popular item in 14 years as it responds to soaring inflation.

EUR

The euro is weaker than most major currencies in the early morning trade. Hungary’s prime minister Viktor Orbán is facing a growing international backlash over inflammatory comments about race that led to the resignation of his close aide, Zsuzsa Hegedüs, adviser on social inclusion. In his annual speech in Baile Tusnad, a Romanian town home to a large Hungarian community, Orbán warned against his country becoming more “mixed race” as in western nations. He said it was fine for nations in the Carpathian basin to mix among themselves, but not with “non-Europeans”. The party with the most votes in Italy’s centre-right coalition will choose the prime minister if the bloc wins the coming election, the alliance said on Wednesday, putting far-right leader Giorgia Meloni in pole position for the top job. The Spanish government said on Wednesday it will ask the European Parliament to consider allowing the use of Catalan in the chamber, in what would be a first for a European regional language.

USD

The dollar is stronger against the euro and weaker against sterling this morning. Dozens of former Republican and Democratic officials announced on Wednesday a new national political third party to appeal to millions of voters they say are dismayed with what they see as America’s dysfunctional two-party system. The new party, called Forward, will initially be co-chaired by former Democratic presidential candidate Andrew Yang and Christine Todd Whitman, the former Republican governor of New Jersey. They hope the party will become a viable alternative to the Republican and Democratic parties that dominate U.S. politics. U.S. Democratic Senator Joe Manchin said on Wednesday he has reached a deal with Senate Democratic leader Chuck Schumer on a bill to increase corporate taxes, reduce the national debt, invest in energy technologies, and lower the cost of prescription drugs. Manchin has often been a roadblock to President Joe Biden’s policy goals, including those specifically addressed in the bill.

Markets

Stocks rose on Thursday as the prospect of a slower pace of Federal Reserve monetary tightening filtered across global markets. Investors are turning their focus to the busiest day of the earnings season along with key economic data. Mining and energy shares gained in Europe as oil advanced. Solar energy and renewables stocks rallied in Europe and premarket trading after US Senator Joe Manchin and Senate Majority Leader Chuck Schumer struck a deal on a tax and energy policy bill, with Vestas Wind Systems A/S surging more than 12%. Chinese developers jumped after a report said banks may provide support. A dip in futures suggested the US rally could stall when Wall Street reopens, with technology stocks set to pull back after their biggest jump since November 2020. Big Tech will be a particular focus on Thursday with results from Amazon.com Inc., Apple Inc. and Intel Corp. Swaps tied to the date of Fed policy meetings imply a 3.3% peak for the fed funds rate around year-end – not much higher than the current range of 2.25% to 2.5%.

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

8:00 a.m.: Sweden June retail sales
9:00 a.m.: Sweden July economic tendency survey
9:00 a.m.: Spain June retail sales, 2Q unemployment rate
9:00 a.m.: Hungary central bank sets one-week deposit rate
11:00 a.m.: Euro area July consumer confidence
11:00 a.m.: Italy sells bonds
2:00 p.m.: Germany July CPI
2:30 p.m.: US initial jobless claims, 2Q GDP, 2Q core PCE
3:00 p.m.: ECB’s Visco speaks
Turkey central bank amends inflation outlook
Biden meets with CEOs from key sectors

Corporate Events

Earnings include Linde, Sanofi, L’Oreal, Amazon, Apple, Merck & Co., Sirius, Carlyle, AGCO, Baxter, Royal Caribbean, Mastercard, Honeywell, Harley-Davidson, Pfizer, Comcast, PG&E, Hershey, Brunswick, Weatherford, Southwest Airlines, Southern Co, Hertz, First Solar, Roku, Intel, US Steel

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