June 20, 2022

“The Federal Reserve’s efforts to tame US inflation which reached a 40-year high last month, have contributed to a surge in US mortgage rates not seen in 35 years – the average interest rate on a 30-year fixed rate mortgage jumped to 5.78%, the highest level since November 2008.”

Tim Hallinan – Trading Director

Main Headlines

US mortgage rates have surged by the most in 35 years as inflation soars and interest rates rise, threatening to leave many first-time homebuyers on the sidelines. The average interest rate on a 30-year fixed rate mortgage jumped by more than half a percentage point to 5.78%, the highest level since November 2008. The weekly increase was the sharpest since 1987. The rate was 3.2% at the start of the year, while a year ago, before the Federal Reserve embarked on an aggressive campaign to raise interest rates, the 30-year fixed rate mortgage averaged 2.93%. Homebuyers stunned by the rapid climb in mortgage rates can look to the Federal Reserve’s efforts to tame US inflation that reached a fresh 40-year high last month, as well as rising inflation expectations, which suggest Americans are becoming more concerned about the outlook and their finances. The Fed on Wednesday raised its benchmark rate by 0.75 percentage points, the largest increase since 1994.

Britain’s energy regulator has promised to crack down on electricity and gas suppliers setting households’ direct debits too high, after the government complained some companies were raising monthly payments “beyond what is required”. Ofgem will publish several proposals today aimed at preventing a repeat of the crisis of last autumn and winter, when nearly 30 energy suppliers went bust as record wholesale gas prices exposed deep flaws in their business models. Those supplier failures cost households £94 each, as they had to meet the costs of transferring stranded customers to new providers. Among the proposed reforms, Ofgem plans to tighten rules on the level of direct debits suppliers can charge customers to ensure credit balances “do not become excessive”. The proposals also include rules to protect customer money when suppliers fail so that other households do not have to pick up the bill for those bankruptcies.

GBP

Sterling is stronger against the dollar and weaker against the euro this morning. The biggest rail strikes for a generation will be followed by further action lasting all year and beyond unless a deal is reached, the leader of the RMT union has warned after last-ditch talks to avoid industrial action in the coming days failed – the government and rail industry are in a row over low pay rises, potential job cuts and changes to working practices. British lenders have started to ramp up the pace of price increases on their fixed-rate mortgages as they brace for higher interest rates from the Bank of England. At least nine banks and building societies have put up rates in recent weeks, with the BoE base rate now forecast to hit almost 3% this year. Boris Johnson will face a backlash from south-east England at the next general election if his levelling-up agenda squeezes transport funding for London, London mayor Sadiq Khan has warned.

EUR

The euro is well bid against most major currencies overnight. The eurozone is well placed to ride out recent market volatility and its economy will grow this year and next, the Eurogroup president said, denying that the currency union faces a crisis akin to that which struck a decade ago. Russia’s military assault on Ukraine may have stalled in the Donbas, but its ability to prevent millions of tonnes of grain from leaving Black Sea ports is proving far more successful, with ominous consequences for Kyiv and the global food crisis. With the grain stores full to bursting, it also means there is little space to keep the coming harvest and even less incentive for farmers to sow next year’s crop. Germany will significantly increase its use of highly polluting coal to preserve energy supplies ahead of the winter as Russian cuts to gas exports threaten shortfalls in Europe’s largest economy. Italy, which has also seen gas supplies from Russia fall, is expected to announce emergency measures in the coming days if supplies are not restored.

USD

The dollar is weaker than most major currencies in the early morning trade. A top US Federal Reserve official expressed early support for another 0.75 percentage point interest rate rise at the central bank’s next meeting in July, in anticipation that inflation will not moderate sufficiently to slow the pace of monetary tightening. Recession risks are growing, and it will take “a couple of years” for inflation to return to the US Federal Reserve’s target of 2%, Loretta Mester, president of the Cleveland Fed, said on Sunday. Mester said that while monetary policy can target the excessive demand in the economy, it will take time to get the supply side “to come back into better balance”. The Biden administration’s plan to sell four large, armed drones to Ukraine has been paused on the fear its sophisticated surveillance equipment might fall into enemy hands, according to two people familiar with the matter.

Markets

Stocks in Europe wavered, and iron ore tumbled as concerns about a wave of monetary tightening and slowing demand in China gripped global markets. The Stoxx Europe 600 index fluctuated after the biggest five-day plunge in 15 weeks, with basic resources and construction stocks underperforming. France’s equity benchmark lagged, and the country’s bonds fell after President Emmanuel Macron failed to garner an absolute majority in parliament, putting his reform agenda in peril. S&P 500 and Nasdaq 100 futures made modest gains. A dollar gauge edged lower. Economic pessimism hit commodities: crude oil held a near-7% Friday plunge and iron ore wiped out all this year’s gains. Markets are set to remain on edge amid elevated price pressures and concern that monetary tightening in a range of nations portends more losses. Demand for raw materials has been hit by China’s slumping property market and the country’s inability to put the coronavirus behind it.

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

8:00 a.m.: Germany May PPI
9:00 a.m.: ECB’s Muller speaks
9:30 a.m.: ECB’s Visco speaks
10:15 a.m.: ECB’s Centeno speaks
11:00 a.m.: Euro-Area April construction output
11:30 a.m.: Germany sells bills
3:00 p.m.: ECB’s Lagarde speaks
US observers Juneteenth public holiday.
Bloomberg Qatar Economic Forum in Doha through June 22.

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