June 22, 2022

“As the cost-of-living crisis continues to squeeze British consumers, the UK’s inflation rate hit another 40-year high in May, reaching 9.1% – the highest rate of any of the G7 countries.”

Tim Hallinan – Trading Director

Main Headlines

Fed chair Jay Powell will today face US lawmakers for the first of two congressional hearings on the state of the economy and how the Fed seeks to accomplish its dual mandate of stable prices and maximum employment. The US central bank’s commitment to restoring price stability was “unconditional”, policymakers wrote, in their most emphatic pledge to date to tackle the most acute inflation problem in roughly 40 years. While that promise eliminated any doubt of the Fed’s overarching priorities, it also suggested that some of the historic economic recovery since the depths of the pandemic might now need to be sacrificed in order to fulfil that goal. Powell’s testimony comes at a watershed moment not only for the US central bank — which last week markedly stepped up its efforts to quell soaring prices by implementing the biggest interest rate increase since 1994 — but also the White House, which is trying to manage expectations of a slowdown in growth and the labour market heading into November’s midterm elections and beyond.

The UK’s inflation rate hit another 40-year high in May, reaching 9.1%, its highest level since 1982. Fuelled by higher food prices last month, the rise from the 9% rate in April was in line with economists’ expectations that inflation will hit double digits by the autumn. The Bank of England expects the inflation rate to exceed 11% in October, significantly higher than other similar countries in the G7. The rise in inflation will add to cost-of-living pressure on households, intensify demands for wage rises to offset higher prices and make it more difficult to resolve industrial disputes such as this week’s rail strike. The biggest contributor to the increase in inflation came from food prices, which increased 1.5% in May, with bread, cereals and meat rising fastest. The Office for National Statistics said that road fuel prices were 32.8% higher in May than a year earlier, the largest annual jump in prices in the category since detailed indices were first compiled in 1989.

GBP

Sterling is weaker than most major currencies in the early morning trade. Rishi Sunak is preparing to meet North Sea oil and gas producers that have protested against his planned windfall tax on their profits, as the government also signals it is cooling on proposals to extend the levy to electricity generators. The chancellor is due to meet industry executives in Aberdeen on Thursday — including from Shell, BP, and Harbour Energy — after they hit out at his proposed 25% windfall tax on their profits to partly fund a £15 billion package of government support for households struggling with rising energy bills. Britain’s deputy prime minister Dominic Raab has said that the government cannot allow “militant unions” to win over rail strikes, warning that their demands could lead to an inflationary spiral. Raab also insisted that the economy’s fundamentals remain strong, despite data showing inflation has reached a fresh 40-year high in May.

EUR

The euro is stronger against sterling and weaker against the dollar this morning. The International Energy Agency has warned that Europe must prepare immediately for the complete severance of Russian gas exports this winter, urging governments to take measures to cut demand and keep ageing nuclear power stations open. Fatih Birol, the head of the IEA, said Russia’s decision to reduce gas supplies to European countries in the past week may be a precursor to further cuts as Moscow looks to gain “leverage” during its war with Ukraine. Food prices for the eurozone’s shoppers are set to keep rising at near-record rates for at least another year, despite the region’s largely self-sufficient agriculture sector, according to the European Central Bank. Russia’s invasion of Ukraine has disrupted supplies from the war-hit region and led to a surge in the price of key agricultural commodities imported from there, such as fertiliser, animal feed and sunflower oil.

USD

The dollar is well bid against most major currencies overnight. President Joe Biden on Tuesday hit out at Chevron chief executive Mike Wirth, calling the oil major boss “sensitive” after he criticised the US administration’s energy policy, as high fuel prices deepen tensions between the White House and the domestic industry. The exchange came ahead of a meeting scheduled on Thursday between energy secretary Jennifer Granholm and senior industry executives including Wirth, whose company is the second-largest US oil and gas producer by market value. Trading volumes for US bond exchange traded funds spiked to a record high on June 13 as soaring inflation prompted investors to bet on a more aggressive path for interest rate hikes by the Federal Reserve at its meeting later that week. US fixed income ETF turnover hit $58bn on June 13, a one-day record which surpassed the $53bn of trading on the previous busiest session in March 2020 when financial markets went into freefall during the early stages of the coronavirus pandemic.

Markets

US equities rebounded Tuesday after last week’s rout erased nearly $2 trillion from the S&P 500. Treasuries retreated. The S&P 500 added 2.4%, led by energy and consumer discretionary shares, while the tech-heavy Nasdaq 100 surged 2.5% following the long weekend. Revlon Inc. gained 62% in the wake of its Chapter 11 bankruptcy filing, Kellogg Co. was up 2.0% after plans to separate into three companies, and a basket of the most-shorted stocks rose 2.7%. The drop in Treasuries took the benchmark 10-year yield back to 3.3%. Sentiment this week is being helped by comments from President Joe Biden that a US recession isn’t “inevitable,” but the outlook remains parlous for investors weighing whether the market has bottomed. History suggests bear markets usually take time to find a floor, especially when they are accompanied by a recession, as happened in 2008’s financial crisis. Richmond Federal Reserve President Thomas Barkin said the US central bank should raise interest rates as fast as feasible in order to quell rampant inflation.

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

10:00 a.m.: Poland May retail sales
10:30 a.m.: UK April house price index
10:40 a.m.: BOE’s Cunliffe speaks
11:00 a.m.: Belgium June consumer confidence
12:00 p.m.: Ireland May PPI
2:30 p.m.: Czech Republic rate decision
3:00 p.m.: SNB’s Jordan speaks
5:00 p.m.: Eurozone June consumer confidence
6:00 p.m.: Russia May PPI
IEA World Energy Investment annual report

Corporate Events

Earnings include Korn Ferry, KB Home, HB Fuller, Steelcase, Worthington Industries

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