May 11, 2022

“European Central Bank President Christine Lagarde has stated that the first interest-rate hike in more than a decade may follow just weeks after policy makers conclude net bond-buying, likely next quarter – inflation is at almost four times the ECB’s 2% goal, piling pressure on the central bank to follow the Federal Reserve and Bank of England with tightening monetary policy.”

Tim Hallinan – Trading Director

Main Headlines

US President Joe Biden said fighting inflation is his “top domestic priority” in an economic speech at the White House yesterday and laid out his administration’s plans to lower prices on things like gas – which has hit a record-high cost. The president said that while the pandemic and Russian President Vladimir Putin’s invasion of Ukraine have contributed to inflation, lack of competition and inhibited access to materials is why prices have continued to go up. Biden has also said that he is considering eliminating Trump era tariffs on China as a way to lower prices for goods in the US, boosting investor sentiment for the Chinese yuan – which just yesterday hit a 19-month low against the dollar. Currency traders said the rebound in the yuan was capped as market participants were cautious ahead of US inflation data due to be released later in the day, which could provide clues as to how aggressively the Federal Reserve will tighten monetary policy.

The tide of pessimism sweeping through Britain’s households is unmatched elsewhere among Europe’s major economies and suggests the government may have misjudged its response to an escalating cost-of-living crunch. Chancellor Rishi Sunak has so far resisted calls to extend support measures for households, saying he will look at the situation again in the second half of the year when energy prices are due to rise again. Some of the economic data, however, suggest a more urgent approach may be warranted. Last month the closely watched GfK survey showed the public’s confidence in their personal finances fell to the lowest level since records began in 1985, with sentiment over the economic outlook also nearing all-time lows. Speaking during a debate on his legislative agenda, announced earlier in the day, PM Johnson insisted that he and the chancellor will have more to say in the coming days on helping voters with the current cost of living crisis.

GBP

Sterling is well bid against most major currencies overnight. Chancellor Rishi Sunak has faced tough criticism for raising national insurance at a time when households are struggling with a tightening cost-of-living squeeze. National insurance contributions rose 1.25 percentage point for millions of workers in April and is seen to be disproportionately affecting those on modest incomes. The chancellor is demanding North Sea oil and gas companies agree to a significant boost to their energy investments in the UK to avoid being hit by a windfall tax. Sunak does not want to introduce the levy — he has warned it would deter investment — but he is coming under increasing pressure from MPs to impose the tax to help households struggling with soaring energy bills. Britain said yesterday that it will require its regulators to help the City of London remain a globally competitive financial centre after being largely cut off from the European Union due to Brexit.

EUR

The euro is stronger against the dollar and weaker against sterling this morning. Europe’s largest asset manager is betting that the euro will fall to parity with the US dollar this year as the mounting threat of recession prevents the European Central Bank from lifting interest rates above zero. Vincent Mortier, chief investment officer at Amundi, said he expected the ECB to prioritise keeping a lid on government borrowing costs over fighting inflation. Such a decision would leave the eurozone central bank even further behind the US Federal Reserve in fighting inflation and knock the euro to $1 for the first time since 2002. Ukraine welcomed what it called a “historical turning point” as German Foreign Minister Annalena Baerbock visited Kyiv yesterday, backing Ukraine’s bid for full European Union membership and cutting energy ties to Russia. Germany has thrown its weight behind an embargo on Russian oil and Baerbock said it aimed to cut its imports of Russian energy to zero, adding “and that will stay that way forever”.

USD

The dollar is weaker than most major currencies in the early morning trade. The turbulence in global markets is throwing a lot of mixed signals, but there’s one that everyone is agreeing on: this is a very bullish time for the US dollar. As long as fear runs through markets, the US currency will keep charging higher. The clamour for the safest of safe havens, the Federal Reserve’s aggressive rate hikes, and global shocks from the war in Ukraine and China lockdowns are all driving more cash into the dollar. It’s a market force that will raise the buying power of Americans facing inflation, but also make exports less attractive. The stronger dollar will tighten financial conditions at a time when many economists are warning about the prospect for a recession. The US Bureau of Labor Statistics is expected to print the yearly inflation at 8.1% lower than the former figure of 8.5% while the core CPI that excludes food and energy is likely to land at 6%.

Markets

Stocks closed higher in a session marked by exhausting gyrations, with investors trying to make sense of comments from a multitude of Federal Reserve speakers ahead of key inflation data today. The S&P 500 bounced back after a selloff that erased $9 trillion from the US equity market this year but finished well below its Tuesday’s highs. Several traders were still reluctant to call a bottom amid worries over inflationary pressures, tighter monetary policy, and an economic slowdown. The tech-heavy Nasdaq 100 outperformed following its biggest three-day wipeout in at least two decades. Treasury 10-year yields fell. Oil settled under $100 a barrel, shedding almost 10% in two days. Investors awaited the consumer-price index report, which is expected to show that while pressures were still elevated, inflation probably moderated in April. Fed officials reinforced Chair Jerome Powell’s message that half-point hikes are on the table in June and July, but a larger move of 75 basis points could be warranted later in the year.

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

8:00 a.m.: Germany April CPI
8:00 a.m. ECB’s Elderson speaks
9:15 a.m. ECB’s Nagel speaks
10:00 a.m.: ECB’s Lagarde and Vasle speak
10:30 a.m.: ECB’s Makhlous speaks
10:50 a.m.: ECB’s Knot speaks
12:00 p.m.: Portugal April CPI
1:30 p.m.: ECB’s Vasle, Centeno, Buch, Muller speak
2:20 p.m.: ECB’s Schnabel speaks
2:30 p.m.: US April CPI
4:30 p.m.: EIA US crude oil inventory report
6:00 p.m.: Fed’s Bostic speaks

Corporate Events

Earnings include Rivian, Disney, Bumble, Compass, Ahold Delhaize, E.ON, Siemens Energy, Continental, Alstom, Ubisoft

To learn more about Ballinger & Co., please visit our website or our LinkedIn page.