May 12, 2022

“The UK economy contracted by 0.1% in March, reflecting concerns that the UK could be plunged into a recession before end of year – whilst the Bank of England has forecasted inflation to rise above 10% this year, as the cost-of-living crisis and surging inflation continues to take a toll on households.”

Sam Cornford, Partner – Head of Trading

Main Headlines

US consumer prices rose at an annual rate of 8.3% last month, more than economists’ expectations, and staying at a four-decade high – underscoring the urgency of the Federal Reserve’s push to stamp out inflation. Although the consumer price index moderated from the 8.5% increase recorded in March – it was slightly higher than economists’ expectations of an 8.1% rise. An underlying gauge of inflation also rose more than expected, highlighting stresses on households. Stripping out volatile items such as food and energy, however, the monthly rise in core CPI increased 0.6% last month, compared with 0.3% in March – on an annual basis, that amounted to a 6.2% increase. US stocks retreated, led by a sell-off in tech, with the Nasdaq Composite ending the day down 3.2% and the S&P 500 shedding 1.6%. The data may represent the beginning of a peak in the coronavirus pandemic-era inflation surge caused by red-hot consumer demand coupled with severe supply chain bottlenecks.

The UK economy contracted by 0.1% in March as the cost-of-living crisis and surging inflation took a toll on households. The figure, from the Office for National Statistics, compares with no growth in February and 0.7% growth in January. Last week, the Bank of England warned that the UK could plunge into recession before the end of the year, amid spiralling inflation. It has forecasted inflation to rise above 10% this year – the highest level since 1982. Without urgent further Government support, economic experts have warned that an estimated 1.5 million households will struggle to pay for food and energy in the next year. With this in mind, Chancellor Rishi Sunak is preparing to announce in the summer a major new support package for UK households struggling with soaring energy bills, as he seeks to head off criticism that he is not doing enough to tackle the cost-of-living crisis.

GBP

Sterling is weaker than most major currencies in the early morning trade. Ministers made a last-minute decision to withdraw plans to force big UK companies and asset managers to disclose their environmental impact from Tuesday’s Queen’s Speech, according to government sources. The decision to drop the “sustainability disclosure requirements” from a new financial services bill comes amid a wider retreat by the government from tightening corporate governance. Bonus payments stand at their highest since 2013 as a share of UK earnings, as employers seek ways to pay workers for higher living costs without committing to inflation-busting wage deals. This was partly owing to a bounce-back in bankers’ bonuses, after a lean year in 2021, but pay experts said the trend also extended to sectors where big bonuses are less typical. The latest official data suggest employers have increasingly been using discretionary awards to compete for scarce workers, while trying to limit the overall rise in their wage bill.

EUR

The euro is stronger against sterling and weaker against the dollar this morning. The EU will have to spend close to €200 billion in the next five years to secure energy independence from Russia, according to draft plans that set out aggressive targets in areas such as clean energy and lowering consumption. A draft of proposals from the European Commission shows Brussels projects that extra investment of €195 billion will be needed between now and 2027, on top of plans to boost spending on carbon reduction. The EU will also have to cut energy consumption more than previously thought to meet ambitious net zero carbon emissions targets by 2050. European Central Bank President Christine Lagarde signalled that she would support raising the main interest rate in July, leading economists to declare that the first increase for more than a decade is almost certain to go ahead. Turkish authorities have raised the pressure on the country’s banks to limit corporate clients’ purchases of foreign currency in an effort to halt a renewed slide of the lira.

USD

The dollar is well bid against most major currencies overnight. The Biden administration has drafted an executive order that would give the Department of Justice vast powers to stop foreign adversaries like China from accessing Americans’ personal data. The proposal, which is being reviewed by government agencies, would also direct the Department of Health and Human Services to prevent federal funding from supporting the transfer of US health data to foreign adversaries. US President Joe Biden on Wednesday blamed Russia’s war on Ukraine for the latest spike in global food prices and visited a family farm in Illinois where he pledged to support the nation’s farmers as they seek to fill the supply shortage. The White House announced actions on Wednesday aimed at helping US farmers boost food production and lower food prices. The US yesterday surpassed 1 million Covid-19 deaths — a once unthinkable scale of loss even for the country with the world’s highest recorded toll from the virus.

Markets

US equity-index futures and European stocks declined after stubborn US inflation bolstered the case for more aggressive monetary tightening by the Federal Reserve. Sinking cryptocurrencies exacerbated risk aversion. Contracts on the S&P 500 and Nasdaq 100 indexes slid at least 0.7% after the S&P 500 Wednesday hit the lowest level since March 2021. Europe’s Stoxx 600 gauge fell more than 2%, led by raw-material companies. The dollar rallied for a sixth day and Treasuries gained as investors sought the safety of havens. Bitcoin sank 10%. Wednesday’s hotter-than-expected US inflation reading has revived concerns of a 75 basis-point rate increase by the Fed, rather than the 50 basis-point pace that markets have come to grips with. Worries about the impact of rising rates on economic growth, combined with the war in Ukraine and slowing Chinese demand amid Covid lockdowns, are battering risk assets.

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

8:00 a.m.: Sweden April CPI
8:00 a.m.: UK 1Q GDP
8:30 a.m.: Switzerland April producer and import prices
9:00 a.m.: Hungary one-week deposit rate
10:05 a.m.: ECB’s de Cos speaks
12:00 p.m.: Riksbank’s Ingves speaks
12:00 p.m.: Ireland April CPI
12:30 p.m.: ECB’s Makhlouf speaks
2:30 p.m.: US weekly jobless claims
6:00 p.m.: USDA WASDE Report
OPEC, IEA Monthly Oil Market Reports

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