July 8, 2022

“Senior Federal Reserve officials have warned that a failure to tame soaring inflation, allowing for soaring prices to become entrenched, will damage the US economy and place the central bank’s integrity under pressure.”

Sam Cornford, Partner – Head of Trading

Main Headlines

Two senior Federal Reserve officials have warned that failure to tame soaring inflation will damage the US economy, with one of them saying the situation is already testing the central bank’s credibility. Christopher Waller, a Fed governor, and James Bullard, president of the St Louis branch, used separate events to insist the central bank is committed to fighting runaway prices that have engulfed nearly every corner of the economy and appear increasingly at risk of becoming entrenched. The foremost concern is that elevated inflation — now running at the fastest pace in roughly four decades — will alter expectations about the price outlook and lead households and businesses to anticipate future increases. That risks sparking a destabilising cycle that leads to an even worse inflation problem. As the Fed decides on the trajectory of future rate increases, it will be looking for clear-cut signs of a deceleration in the pace of monthly inflation. Officials also appear more willing to make sacrifices in the labour market in their bid to stamp out inflationary pressures.

Scandal-ridden Boris Johnson announced yesterday that he would quit as British prime minister after he dramatically lost the support of his ministers and most Conservative lawmakers but said he would stay on until his successor was chosen. Bowing to the inevitable as more than 50 government ministers and aides quit and lawmakers said he must go, an isolated and powerless Johnson said it was clear his party wanted someone else in charge, but that his forced departure was “eccentric” and the result of “herd instinct” in parliament. Conservative party grandees intend to install a new UK prime minister by early September when the House of Commons returns from its summer break, according to MPs with knowledge of the plans. Boris Johnson’s resignation announcement yesterday triggered an internal contest for electing a new party leader, who will in turn be appointed prime minister by the Queen. Plans for the race will be signed off at a meeting of the party’s 1922 committee of backbench MPs on Monday.

GBP

Sterling is weaker than most major currencies in the early morning trade. British business leaders on Thursday welcomed Boris Johnson’s decision to resign as a chance to end recent political instability, calling for a swift transition to a new administration to help companies cope with soaring inflation and the threat of recession. UK house prices defied expectations of a slowdown and increased at their fastest pace in 18 years, boosted by a shortage of properties for sale. Property prices grew at an annual growth rate of 13% in June, up from 10.5% the previous month and at the fastest pace since late 2004, pushing the typical UK house price to another record of £294,845. British Airways has avoided a damaging summer strike after agreeing a “vastly improved” pay deal, according to unions, a boost to the airline that has been forced to cancel thousands of flights this year. The Unite union said a dispute affecting check-in staff at London’s Heathrow airport “has been suspended” after the company made a new offer on pay.

EUR

The euro is stronger against sterling and weaker against the dollar this morning. President Vladimir Putin said yesterday that Russia has barely gotten started in Ukraine and dared the West to try to defeat it on the battlefield, while insisting that Moscow was still open to the idea of peace talks. In a hawkish speech to parliamentary leaders more than four months into the war, Putin said the prospects for any negotiation would grow dimmer the longer the conflict dragged on. Speaking at a G20 gathering in Indonesia, Russian Foreign Minister Sergei Lavrov said that attempts to isolate Moscow with sanctions was akin to a declaration of economic war by the West, dismissing what he said was “frenzied” criticism of the war in Ukraine. China and Russia have maintained normal exchanges and promoted cooperation in various fields and cast aside any “interference”, showing the “strong resilience” and “strategic resolve” of their relations, Chinese Foreign Minister Wang Yi said in a statement yesterday.

USD

The dollar is well bid against most major currencies overnight. US mortgage rates fell at the fastest pace since 2008 in the past week, as economic jitters in bond markets feed through to home loans at a time when dwelling costs are at historic highs. The average interest rate charged on a 30-year fixed-rate mortgage dropped for a second consecutive week to 5.3%, down from 5.7% the week before. Big global emitters are calling into question the US’s commitment to tackling climate change, following legislative setbacks capped by the Supreme Court ruling against federal regulation of carbon emissions. With four months until the UN’s COP27 climate summit in Egypt, the US failure to implement its signature climate policies is weighing on the outcome of a summit that is struggling to gain momentum because of Russia’s invasion of Ukraine. The US has called on Japan to step up pressure on the country’s cryptocurrency exchanges and miners, urging them to sever ties with Russia in a bid to further financially isolate the country from the outside world.

Markets

US stock-index futures slid with euro-area equities as investors awaited employment data to gauge whether the world’s largest economy can avoid a recession. Contracts on the S&P 500 and Nasdaq 100 gauges fell at least 0.3% each, signalling US stocks will pare weekly gains. The Euro Stoxx 50 Index halted a two-day rally. Treasuries rose, with the 10-year yield shedding 2 basis points. The Bloomberg Commodity Index headed for the longest streak of weekly losses since March 2020. Global markets are repositioning for the possibility of a US recession as the Federal Reserve delivers successive rate hikes to tame elevated inflation. Two of the Fed’s most hawkish policy makers backed raising interest rates another 75 basis points this month, while playing down recession fears. Investors suspended their judgment on the question, keeping portions of the US yield curve inverted and awaiting Friday’s nonfarm payrolls report.

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

8:45 a.m.: France May trade balance
9:00 a.m.: Hungary June CPI
9:00 a.m.: Turkey May current account balance
10:00 a.m.: Italy May industrial production
10:00 a.m.: ECB’s Visco speaks
12:00 p.m.: ECB’s Muller speaks
1:55 p.m.: ECB’s Lagarde speaks
2:30 p.m.: US June jobs report
4:00 p.m. US May wholesale inventories
6:00 p.m.: Russia June CPI
6:45 p.m.: ECB’s Villeroy speaks
ECB publishes climate-risk bank stress test results

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