July 7, 2022

“Minutes from the Federal Open Market Committee, released yesterday, revealed the alarm spreading through the top ranks of the US central bank over inflation – the Fed are expected to raise rates by either 0.50 or 0.75 percentage points this month.”

Tim Hallinan – Trading Director

Main Headlines

Top Federal Reserve officials think entrenched inflation is a “significant risk” to the US economy and fear tighter monetary policy will be needed if price growth exceeds their expectations, according to an account of their most recent meeting. The minutes of the US central bank’s June meeting, when the Fed delivered the first 0.75 percentage point rate rise since 1994, also showed that policymakers now support raising interest rates to the point at which economic activity is restrained, with the possibility that they could become “even more restrictive” if warranted by the data. The minutes from the Federal Open Market Committee, which were released yesterday, revealed the alarm spreading through the top ranks of the US central bank over inflation, which is running at an annual pace of 8.6%. The Fed will decide whether to raise rates by 0.50 percentage points or 0.75 percentage points at its meeting this month, although several officials have indicated their support for the larger increase.

The Bank of England would do “whatever is necessary” to contain inflation, but splits on the monetary policy committee (MPC) made it unhelpful to give guidance on the likely pace, scale and timing of interest rate rises, rate-setters at the central bank said yesterday. Huw Pill, the BoE’s chief economist, told an audience at King’s College London he was “in the price stability business” and that the “immediate issue for monetary policymakers is whether the pace of policy tightening now needs to change”. Although Pill voted with the majority for a 0.25 percentage point rate rise in June, he said he would be willing to step up the pace of policy tightening. The BoE expects inflation to rise from its current rate of 9.1% to about 11% in the autumn, and Pill said the resulting hardship for those most exposed to rising living costs showed it was “essential we bring inflation back down to target”. Pill added that while he was willing to back bigger rate increases if needed, his vote in August would be determined by the flow of new economic data and analysis of it.

GBP

Sterling is stronger against the dollar and weaker against the euro this morning. Boris Johnson’s turbulent three-year premiership was nearing its end on Wednesday night after he was urged to quit by a delegation of his closest cabinet allies on a night of chaos in Downing Street. As his premiership hung by a thread, the UK prime minister retaliated by sacking Michael Gove, one of the ministers who told him to go, in a sign that Johnson intended to go down fighting. Johnson was warned that unless he stepped down there would be further cabinet resignations, followed by an inevitable humiliating defeat by Tory MPs in a no-confidence vote last week. This morning, the BBC reports that Johnson will announce his resignation today, after being abandoned by more than 50 MPs, in a rebellion that left government dangerously close to paralysis. White-collar job movers are benefiting from pay increases of up to 25% as firms battle for staff in roles across financial and professional services, according to recruiter Robert Walters.

EUR

The euro is well bid against most major currencies overnight. Former Russian President Dmitry Medvedev said attempts by the West to punish a nuclear power such as Russia for the war in Ukraine risked endangering all of humanity, as the near five-month conflict leaves cities in ruins and thousands homeless. Russia will give the state greater control over private business and workers in order to put the economy on a stronger war footing, signalling that the country is preparing for the long haul in its battle for control of Ukraine. European lawmakers have approved a law designating gas and nuclear as sustainable energy sources, as part of a system that was intended to influence direct investment in clean energy. The vote in Strasbourg yesterday followed months of heated debate over the inclusion of gas and nuclear in the EU’s financial labelling “taxonomy”, as the bloc attempts to cut its reliance on Russian gas while simultaneously meeting its pledge to reach net zero greenhouse gas emissions by 2050 in order to limit global warming.

USD

The dollar is weaker than most major currencies in the early morning trade. The heads of the FBI and MI5 have warned that China’s industrial espionage poses a growing threat to western groups, including through special purpose acquisition companies. In a joint appearance in London, the chiefs of the US and UK intelligence agencies called on companies to be much more vigilant about China. FBI director Christopher Wray said Beijing was using “elaborate shell games” to disguise its spying and was even taking advantage of Spacs. McCallum said MI5 had seen a sevenfold increase in China-related investigations since 2018, had doubled its capacity to deal with them over the past three years and would probably double capacity again over the next “handful of years”. President Joe Biden plans to nominate Denver International Airport Chief Executive Phil Washington to head the Federal Aviation Administration (FAA), the White House said yesterday. The job has been vacant since March 31 when Steve Dickson, who was nominated to the position by former President Donald Trump in 2019, stepped down about halfway through his five-year term.

Markets

US stocks rose for the third straight day as investors parsed economic data that hinted at slightly slower growth, prompting some to brush off the hawkish stance that the Federal Reserve reiterated in its June meeting minutes as outdated. The S&P 500 ended the session up 0.4% after swinging between gains and losses as investors digested a flurry of data. The tech-heavy Nasdaq 100, whose members have been more sensitive to the rise in bond yields, also rose. The two and 10-year US Treasury yield curve remained inverted. The dollar held onto its gains. Oil fell below $100 a barrel, extending its drop for a second day. All eyes were on the Fed as it revealed details of its June meeting yesterday afternoon. Fed officials agreed last month that interest rates may need to keep rising for longer to prevent higher inflation from becoming entrenched, even if that slowed the US economy, the minutes showed.

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

8:00 a.m.: Germany May industrial production
8:00 a.m.: Norway May industrial production
9:00 a.m.: Hungary central bank rate decision
10:30 a.m.: BOE releases decision maker survey
10:30 a.m.: Spain sells bonds, linkers
10:50 a.m.: France sells bonds
11:45 a.m.: ECB’s Lane speaks
12:00 p.m.: Ireland May industrial production
1:30 p.m.: ECB minutes from June policy meeting
2:30 p.m.: US weekly jobless claims, May trade balance
3:00 p.m.: BOE’s Mann speaks
4:10 p.m.: ECB’s Stournaras, Centeno, Herodotou speak
8:00 p.m.: EIA US crude oil inventory report
Poland central bank rate decision

Corporate Events

Earnings include Levi Strauss, Aritzia
Costco posts June sales

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