June 23, 2022

“The US dollar has steadied in the aftermath of Fed Chair Jerome Powell’s testimony to Congress, in which he acknowledged that a US recession is ‘certainly a possibility’ and that avoiding a downturn largely depends on factors outside of a Federal Reserve’s control.”

Sam Cornford, Partner – Head of Trading

Main Headlines

Jay Powell said a US recession is “certainly a possibility” and warned that avoiding a downturn largely depends on factors outside the Federal Reserve’s control. In testimony to the Senate banking committee on Wednesday, the Fed chair acknowledged it was now more challenging for the central bank to root out soaring inflation while maintaining a strong job market. He argued the US was sufficiently resilient to withstand tougher monetary policy without sliding into a downturn but acknowledged that outside factors, such as the war in Ukraine and China’s Covid-19 policy, could further complicate the outlook. Concerns about a possible recession have grown with worse than expected inflation data this month. While Powell maintained that the US economy was “very strong and well positioned to handle tighter monetary policy”, he acknowledged that further inflation surprises “could be in store”.

Interest payments on UK government debt hit one of the highest levels on record last month as rising inflation limited an expected fall in public sector borrowing. Interest costs rose to £7.6 billion in May, well above the figure for last year and higher than a £5.1 billion forecast from the Office for Budget Responsibility, following a rapid rise in retail price inflation to which many debt payments are linked. The Office for National Statistics said the debt interest payments were the third highest made by the UK central government in any single month and the highest payment made in any May on record. Official data released on Wednesday showed that the Retail Price Index rose at an annual rate of 11.7% in May, the fastest pace since December 1981. Public sector net borrowing nonetheless declined in May — but by less than expected — as inflation also aided government finances by bringing in higher tax revenues.

GBP

Sterling is weaker than most major currencies in the early morning trade. Rishi Sunak has defended the government’s decision to raise the basic state pension in line with inflation as teaching unions across the UK threatened to go on strike this autumn. Speaking to reporters in London after inflation hit 9.1% on Wednesday, the chancellor said the government would be responsible with borrowing and debt “so we don’t make the situation worse”. The National Education Union (NEU) and NASUWT-The Teachers’ Union made the 12% wage demand to Nadhim Zahawi, education secretary, citing the soaring cost of living and the impact of a decade of real-terms cuts to teachers’ pay. Britain fully supports Lithuania’s decision to ban the transit of Russian goods sanctioned by the European Union through its territory, Foreign Secretary Liz Truss said on Wednesday. Russia has warned NATO member Lithuania that unless the transit of goods to Russia’s Kaliningrad exclave on the Baltic Sea was swiftly restored then Moscow would take undisclosed measures to defend its national interests.

EUR

The euro is stronger against sterling and weaker against the dollar this morning. EU leaders are widely expected to endorse Ukraine as a candidate country to join the European Union. While mostly symbolic, the status represents a stunning geopolitical victory for the war-torn country, who until earlier this year was never considered a serious contender to enter the 27-strong bloc. It is also seen as a rebuttal to Russia’s coercive attempt to reinstate its lost sphere of influence. The European Central Bank is anticipated to raise its deposit rate above zero for the first time in a decade in September. The German economy, Europe’s largest, suffered a sharp loss of momentum at the end of the second quarter, with falling exports acting as a drag and economic uncertainty and inflation weighing on domestic demand, a preliminary survey showed on Thursday. S&P Global’s flash Purchasing Managers’ Index (PMI) for services fell to 52.4 in June from May’s final reading of 55.0, but still came in above the 50 mark that denotes expansion for the sixth month in a row.

USD

The dollar is well bid against most major currencies overnight. A senior Biden administration official told reporters on Wednesday that the US would announce a “concrete set of proposals” to raise economic pressure on Russia over its war in Ukraine, hinting at a possible sanctions package when G7 leaders gather in Germany this weekend. US liquefied natural gas producers have announced a string of deals to boost exports as the industry capitalises on shortages that have left Europe with a mounting energy crisis. Cheniere Energy, the biggest American exporter, said it had reached a final investment decision to push ahead with a project that will boost its capacity more than 20% by late 2025. The Biden administration has quietly been leaning on Tesla for help to craft a new policy to allow electric vehicles to benefit from the nation’s lucrative renewable fuel subsidies. This reflects Biden’s priority to fight against climate change, by expanding the scope of the US Renewable Fuel Standard to make it a tool for electrifying the nation’s automobile fleet.

Markets

European stocks retreated and bond yields tumbled as comments by Federal Reserve Chair Jerome Powell and growth data in Europe stoked fear about a global downturn. Oil extended losses. The Stoxx Europe 600 Index slipped about 1%, with miners and energy firms posting the biggest declines. Contracts on the Nasdaq 100 flipped to gains from losses while those on the S&P 500 wavered. The yield on German 10-year bonds sank 17 basis points after an indicator of euro-area economic activity fell to a 16-month low. Treasury yields fell 8 basis points toward 3%. Powell accepted that steep rate increases could trigger a US recession and said the task of engineering a soft economic landing is “very challenging” in testimony to the Senate Wednesday. Policy makers are taking drastic steps to cool inflation at a four-decade high and the Fed chair repeated his resolve to get consumer price growth back down to the 2% target.

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

8:00 a.m.: UK May public finances
8:00 a.m.: Sweden May PPI
8:45 a.m.: France June business, manufacturing confidence
9:00 a.m.: Hungary one-week deposit rate
9:15 a.m.: France June S&P PMIs
9:30 a.m.: Germany June PMIs
10:00 a.m.: ECB publishes economic bulletin
10:00 a.m.: Norway rate decision
10:00 a.m.: Euro-area June PMIs
10:30 a.m.: UK June PMIs
11:30 a.m.: Poland sells bonds
1:00 p.m.: Turkey one-week repo rate
2:30 p.m.: US weekly jobless claims
3:00 p.m.: Russia gold and FX reserves
3:45 p.m.: US June PMIs
4:00 p.m.: Fed’s Powell testifies before House panel
4:30 p.m.: ECB’s Nagel, Villeroy speak
8:00 p.m.: ECB’s Villeroy speaks
Summit of EU leaders starts in Brussels
UK by-elections in Wakefield and Tiverton and Honiton

Corporate Events

Earnings include Accenture

Monte Paschi presents business plan

 

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