May 12, 2023

May 12, 2023 

“The Bank of England’s 25bp rate hike shows resolve against inflation, but food price increases and robust wage growth may slow down its decline. Today’s US reports, including the Preliminary Consumer Sentiment and Inflation Expectations from the University of Michigan, provide vital economic insights. Closer than usual attention may be paid to them given the mixed results of recent releases.” 

Sam Cornford, Partner – Head of Trading

Main Headlines 

The debt limit meeting between President Joe Biden and top lawmakers, originally scheduled for today, has been postponed to early next week, according to a White House spokesperson. Aides from both sides have begun discussions on limiting federal spending as they work towards raising the government’s $31.4 trillion debt ceiling to avoid a catastrophic default. Republican House Speaker McCarthy reassured reporters that the delay does not indicate trouble in the talks but rather a need for continued discussions among staff negotiators before the principals reconvene. 

British asset managers are in advanced talks to create a multi-billion-pound investment fund to support UK start-ups and address the trend of technology firms preferring New York over London. Nicholas Lyons, the lord mayor of London, revealed that the proposed ‘Future Growth Fund’ aims to attract up to £50 billion ($63.11 billion) from British pension funds for investments in fast-growing technology and biotech companies. In other news, British lawmakers initiated an inquiry this morning to examine the fairness of the food supply chain in response to the highest levels of food price inflation faced by households since the 1970s. The cross-party Environment, Food and Rural Affairs (EFRA) Committee of the House of Commons announced its intention to investigate the sharing of profits and risks from “farm to fork,” as well as the extent of regulation in the industry. 

GBP 

Sterling is well bid against most major currencies overnight. The Bank of England raised its key interest rate to 4.5% yesterday afternoon to tackle high inflation. The bank revised its growth projections, no longer expecting a recession, and anticipates slower inflation decline due to persistent food price increases and stronger-than-expected wage growth. Also, contrary to predictions, Britain’s economy grew by 0.1% in Q1 2023 according to data reporting done by economists. However, an unexpected 0.3% decline in March emphasized the fragility of the recovery. Most economists expected a 0.1% growth for the quarter, with stable output anticipated in the final month. According to Darren Morgan of the Office for National Statistics, the March decline was mainly due to decreases across the services sector. 

EUR 

The Euro is stronger against the Dollar and weaker against Sterling this morning. The ECA report revealed that ECB supervisors are often too lenient in managing credit risk, particularly with underperforming banks. It identified multiple deficiencies, suggesting a systemic problem rather than individual bank compliance. The report highlighted inconsistent rule application, leniency towards high-risk lenders, delayed capital decisions, and insufficient supervisory staff. The ECB oversees over a hundred major eurozone banks and has consistently voiced concerns about inadequate risk management and provisioning for bad debt. 

USD 

The Dollar is weaker than most major currencies in the early morning trade. Today, the US will release multiple reports, among which the most important is the Preliminary Consumer Sentiment survey results from the University of Michigan. This survey, based on around 500 consumers, provides a crucial measure of consumer spending, which greatly affects the overall economy. In the past five reports, there has been only one deviation from the forecasted outcome. Therefore, it is uncertain whether the positive trend will persist or if a potential downward shift is beginning. The second most crucial report, the preliminary Inflation Expectations, is also from the University of Michigan, and involves a survey of approximately 500 consumers predicting prices for the next 12 months. These expectations impact future inflation, as the consideration of higher inflation often influences workers’ wage demands as a result. The last five reports have shown mixed results, with two exceeding forecasts and the rest indicating lower figures. However, the difference between these numbers is not as significant as expected. 

Markets 

European stocks rose, with a boost from earnings as luxury group Richemont rallied to a record following estimates-beating results. The pound edged higher higher after data showed the UK economy grew slightly in the first quarter, reducing the risk of recession. Personal-care shares led the advance in Europe, boosted by the surge in Richemont. The Swiss luxury goods maker that owns the Cartier brand said sales in China rebounded following the end of Covid Zero policies. In the US, futures contracts on the S&P 500 and the Nasdaq 100 posted modest gains. A gauge of Asian stocks slipped. 

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

8:45 a.m.: France April CPI
9:00 a.m.: Spain April CPI
12:00 p.m.: UK to sell bills
12:00 p.m.: Riksbank’s Jansson speaks
1:15 p.m.: BOE’s Pill speaks
6:00 p.m.: Russia April CPI
Germany March Current Account
Italy, Sweden, Denmark sovereign ratings to be reviewed by Fitch 

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