May 11, 2023

“The expected BoE interest rate decision today strikes a balance between growth and inflation. It remains to be seen whether they will opt for further rate hikes or maintain stability. Meanwhile, the Dollar is showing resilience against Sterling and the Euro in early trade. Today’s US PPI data will be closely watched for further volatility.” 

Sam Cornford, Partner – Head of Trading 

Main Headlines 

President Joe Biden exerted pressure on Republican lawmakers, urging them to swiftly raise the $31.4 trillion debt ceiling to prevent a recession that could result in substantial job losses. Speaking at an event in Valhalla, New York, Biden expressed determination to succeed in the fight, while his aides and congressional staff sought common ground in Washington ahead of the June 1 deadline. Notably, Biden made his case in a congressional district narrowly won by Republicans in November. This ongoing standoff in Washington over raising the U.S. debt ceiling overshadowed the G7 finance leaders’ meeting, which commenced this morning. This situation intensified concerns about a potential U.S. recession, creating a backdrop of global central banks striving for a smooth economic landing. 

The British government has abandoned its plan to eliminate all European Union laws by the year’s end. This policy raised concerns about legal uncertainty and bureaucratic chaos from businesses and the opposition. Instead, the government intends to modify the legislation currently being processed in parliament. The proposed changes would revoke approximately 600 out of nearly 4,000 EU laws that are still applicable since Britain’s departure from the bloc in 2020. In other news, according to a survey conducted by the Royal Institution of Chartered Surveyors (RICS), British property surveyors noted a decline in demand in April as potential buyers became more cautious in anticipation of an anticipated interest rate hike by the Bank of England, who is expected to raise borrowing costs for the 12th consecutive meeting, bringing the Bank Rate from 4.25% to 4.5%. RICS reported that its measure of new buyer enquiries dropped to a net balance of -37 last month, down from -30 in March, marking the lowest level since January. 

GBP 

Sterling is stronger against the Euro and weaker against the Dollar this morning. New economic forecasts from The National Institute of Economic and Social Research (NIESR) suggest that underlying inflation in the UK and abroad has yet to reach its peak. The think tank predicts that consumer price inflation will reach 5.4% in the last quarter of 2023, surpassing the forecasts of both the Bank of England and the government’s budget watchdog. Later today we are expecting many reports and statements from the Bank of England, concerning Monetary Policy and the BoE’s interest rates, with the forecast matching actual reported number for the last 6 months, so it is likely that we will reach a new interest rate of 4.5%, signalling a new peak and its highest level since the 2008 financial crisis. We will wait to see whether this will be the last of these raises, or if it just a continuation of this recent trend. 

EUR 

The Euro is weaker than most major currencies in the early morning trade. German Economy Minister Robert Habeck stressed the need for Europe to assert its own agenda amidst the China-U.S. rivalry. He acknowledged the difficulties in choosing between the two countries and the impact of their economic conflict on global trade. Habeck highlighted China’s attempts to attract European and German investments while seeking some separation from the U.S. Despite risk mitigation efforts by the German government, European Union, and G7, German companies are increasing investments in China, while U.S. companies aim for more independence from China. French Foreign Minister Catherine Colonna and Chinese Foreign Minister Qin Gang met to discuss the need for a stronger and balanced economic relationship. The meeting followed French President Emmanuel Macron’s recent visit to China and addressed a diplomatic dispute caused by comments from China’s ambassador in Paris regarding Ukraine. Minister Colonna highlighted China’s role in urging Russia to comply with the U.N. Charter, particularly in upholding Ukraine’s sovereignty and territorial integrity. 

USD 

The Dollar is well bid against most major currencies overnight. Negotiations began to raise the U.S. government’s $31.4 trillion debt ceiling, with Republicans demanding spending cuts. Time is limited to avoid an economically destabilizing default on government debt, potentially occurring by June 1 as warned by the Treasury Department. Despite the standoff, there are potential areas of compromise following a White House meeting. Investor anxiety has led to record-high costs of insuring U.S. government debt, raising concerns on Wall Street about the risks of an unprecedented default. Later today we will be receiving the newest reports from the Department of Labour and the Bureau of Labour statistics, with Core and Normal Producer Price index report and the numbers of Unemployment claims. For both PPI reports that last 2 months actual reported numbers have been below the forecast by quite a margin. On unemployment claims, the last actual reporting numbers were higher than the forecasted, and other than 2 weeks ago, this trend has been continuously higher by a considerable margin than the forecasted report. We will see if these trends continue or if they are able to re-stabilise somewhere near the forecasted numbers. 

Markets 

European and US stock futures rose as investors weighed how the latest inflation data will influence central bank policy, with an interest-rate decision due from the Bank of England later. The dollar strengthened. Media stocks were the early leaders in European equities, with the regional benchmark index looking to gain for the first time in three days. On Wall Street, futures for the S&P 500 and the Nasdaq 100 edged higher. Mainland China shares and Hong Kong’s Hang Seng Index fell after Beijing reported slower-than-expected consumer inflation, while producer prices continued to sink. 

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

6:30 a.m.: Netherlands April CPI
11:00 a.m.: Italy to sell bonds
12:00 p.m.: Portugal April CPI
1:00 p.m.: BOE Monetary Policy decision
1:00 p.m.: South Africa March Manufacturing Production
1:10 p.m.: Riksbank’s Floden speaks
1:30 p.m.: BOE’s Bailey speaks
2:00 p.m.: ECB’s Schnabel speaks
2:30 p.m.: US initial jobless claims, April PPI
4:45 p.m.: ECB’s De Cos speaks
7:30 p.m.: ECB’s Guindos speaks
G-7 finance ministers meet in Niigata   

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