June 16, 2022

“The Fed has continued their fight to contain rampant inflation with a 75 basis-point rate hike – which represents the biggest increase since 1994. Fed Chair Jerome Powell has indicated that another 75 basis-point hike is likely in the next meeting of policy makers.”

Tim Hallinan – Trading Director

Main Headlines

The Federal Reserve raised its benchmark policy rate by 0.75 percentage points and said another adjustment of that size was possible at its next meeting. This comes as part of an aggressive plan to tighten monetary policy as the central bank confronts the highest US inflation in 40 years. The decision marks an abrupt pivot from the Fed’s previously telegraphed plans for a second consecutive 0.50 percentage point rate rise, which had been signalled by policymakers before the start of a scheduled “blackout” period ahead of the meeting. Esther George, president of the Fed’s Kansas City branch, was the sole dissenter and backed adhering to previous guidance. Fed chair Jay Powell noted at a press conference after the decision that high inflation was a significant factor in the making the biggest rate rise since 1994. Powell added that an increase of either 0.50 or 0.75 percentage points was likely at the central bank’s next meeting, although he said he did not expect adjustments of that magnitude to become common.

Rishi Sunak would save up to £57 billion for taxpayers over the next three years if he stopped the Bank of England paying interest on money held by commercial banks at the central bank, according to a report from the New Economics Foundation (NEF). The NEF, a left of centre think-tank, recommends the BoE reforms the way that its interest rate underpins the financial system — by no longer paying interest on most of the nearly £1 trillion reserves held by commercial banks overnight. The funds are deposited at the central bank as a result of the BoE’s quantitative easing programme, which has left lenders with reserves far in excess of what they need to manage their liquidity. The interest on the reserves cost taxpayers almost nothing when rates were at rock bottom after the global financial crisis but would cost up to £57 billion by 2025 if rates follow market expectations of a rise to 2.5%.

GBP

Sterling is weaker than most major currencies in the early morning trade. A sharp rise in the number of people dropping out of the UK workforce has been largely because of older workers choosing to retire early, according to new analysis by the Institute for Fiscal Studies. Almost half a million fewer people were in paid work in the UK in the first quarter of 2022 than before the Covid pandemic. This contraction in the size of the workforce — largely because of higher economic inactivity among young people and older workers — is one of the main reasons why the Bank of England is worried that labour shortages will fuel wage growth and stoke inflation. Fewer than one in 10 men, and only 16% of women, in the UK are likely to be good health by the time they reach retirement, according to new research from the Institute for Public Policy Research. Most people’s “healthy life expectancy” falls short of the state pension age, which is currently 66 and will rise to 67 by 2028, according to a report produced in partnership with Future Health, a policy consultancy.

EUR

The euro is stronger against sterling and weaker against the dollar this morning. Israel and Egypt will boost gas deliveries to the EU after the three parties signed a new energy agreement in Cairo yesterday, as Brussels seeks to cut energy dependence on Russia. Recent discoveries in the Mediterranean have made the region a potential source of new imports. Under Wednesday’s memorandum of understanding, which follows similar deals between the EU and the US, and the EU and Qatar, Israeli gas will be liquefied at plants in Egypt, before being sent by tanker to the bloc. The European Central Bank announced yesterday that it plans to create a new tool to tackle the risk of euro zone fragmentation, in a move designed to assuage fears of a fresh debt crisis. The decision comes after the central bank surprised market participants with an emergency meeting to address higher borrowing costs for many European governments.

USD

The dollar is well bid against most major currencies overnight. The US will provide an additional $1 billion in security assistance to Ukraine, including artillery and coastal defence weaponry, President Joe Biden said yesterday. Following a call with Ukraine’s president Volodymyr Zelensky, Biden also said the US would provide $225 million in additional humanitarian assistance, as the west steps up its efforts to help Kyiv resist the Russian assault. Americans are feeling the pain of petrol inflation every time they pull up to the pump, and a supersized surge in the cost of diesel is adding to economically damaging price rises just about everywhere else. The national average price of diesel hit a fresh peak of $5.72 a gallon this week, up 75% over the past year, according to data released on Monday by the US Energy Information Administration. It is one of the sharpest fuel cost increases on record. More than 100 CEOs called on Congress to pass legislation aimed at boosting US economic competitiveness against China, including in chip manufacturing.

Markets

Stocks rallied, halting a five-day rout that took 10% off the S&P 500, after Federal Reserve Chair Jerome Powell said outsized rate hikes will be rare as officials intensify their battle against sky-high inflation. Treasury yields slumped alongside the dollar. Equities pushed higher amid wild swings as the central bank raised rates by 75 basis points – the biggest increase since 1994 – and Powell said it could move by that much in July, or a smaller half-point hike. While “it will take some time” to get inflation back down, the Fed chief is confident that “we will do that.” His remarks sent two-year Treasury yields sinking as much as 24 basis-points. Traders pared bets for tightening next month and are no longer fully pricing a three-quarter point move, having seen it as a done deal previously. Barclays Plc, which was among the first major banks to shift its Fed prediction for June to a 75 basis-point hike, said it anticipates the central bank will return to hiking at a 50 basis-point pace in July.

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

9:00 a.m.: Czech Republic May PPI
9:30 a.m.: Switzerland rate decision
9:50 a.m.: ECB’s Panetta speaks
10:00 a.m.: Italy May CPI
1:00 p.m.: BOE rate decision
2:20 p.m.: ECB’s Makhlouf Speaks
2:30 p.m.: US weekly initial jobless claims; May housing starts, building permits

Corporate Events

Earnings include Adobe, Kroger, Halma, Jabil

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