May 18, 2022

“The British pound and the European currency held onto most of their gains from the previous day as investors are pinning their hopes on easing lockdown measures in China and emerging retails sales in the United States, which are pushing them to riskier assets.”

Sam Cornford, Partner – Head of Trading

Main Headlines

Jay Powell said the Federal Reserve will continue tightening monetary policy until it sees “clear and convincing” evidence that inflation is coming back down towards the US central bank’s longstanding 2 per cent target. The Fed chair on Tuesday sought to affirm the central bank’s commitment to taming price pressures, saying restoring price stability was essential to the smooth functioning of the economy and vowing to raise interest rates to a level that actively constrains demand if necessary.
Further 0.5 percentage point rate rises such as the one the central bank implemented earlier this month are likely, with at least two more in the next two months. The Fed may consider a fourth half-point rate rise at its policy meeting in September if inflation does not moderate significantly by then. Traders now expect the federal funds rate to reach roughly 2.8 per cent by the end of the year, a sizeable jump from its current level of between 0.75 to 1 per cent.

Prices are rising at their fastest rate for 40 years as higher energy bills hit millions of households. UK inflation, the rate at which prices are rising, jumped to 9% in the 12 months to April, up from 7% in March. The surge came as millions of people saw an unprecedented £700-a-year rise in energy costs last month. Higher fuel and food prices, driven by the Ukraine war, are also pushing the cost of living up, with inflation expected to continue to rise this year. Around three quarters of the rise in inflation in April came from higher electricity and gas bills, according to the Office for National Statistics (ONS). A higher energy price cap, which is the maximum price per unit that suppliers can charge customers, kicked in last month, meaning homes using a typical amount of gas and electricity are now paying £1,971 per year on average. With surging prices putting households under increasing pressure, calls for the government to do more to help those struggling are growing.

GBP

Sterling is weaker than most major currencies in the early morning trade. Kwasi Kwarteng, the UK business secretary, will be warned in a Whitehall report that allowing the sale of a Welsh semiconductor company to a Chinese buyer would undermine one of the country’s strategic industries. Three key UK regulators are struggling to recruit and train enough staff to implement the government’s promise to deliver Brexit benefits, a report by the spending watchdog has found. Rishi Sunak has stepped up his warnings to Britain’s oil and gas industry that unless companies announce increased investment plans for the UK “soon” they face a potential windfall tax on their profits. The UK chancellor is under pressure from his political opponents, and some prominent members of his own Conservative party, to impose a one-off levy on energy groups, which have seen profits soar thanks to the higher price of gas.

EUR

Euro is stronger against sterling and weaker against the dollar this morning. Russia is heading into a recession amid high commodity prices and as sanctions squeeze the economy, the Economy Ministry said, according to Tass. European energy giants are pressing ahead with plans to keep buying Russian gas as the European Union’s guidelines appeared to allow them to do so without breaching sanctions. Divisions are opening among NATO members about how to boost military deployments in Eastern Europe after Russia’s invasion of Ukraine, amid disagreements about whether the Kremlin’s faltering battlefield effort means it cannot significantly threaten alliance territory. President Recep Tayyip Erdoğan’s decision to press ahead with his opposition to Sweden and Finland’s bids to join Nato has thrown a spanner in the works of a plan to rapidly admit the Nordic countries to the western military alliance.

USD

The dollar is well bid against most major currencies overnight. US Homeland Security Secretary Alejandro Mayorkas toured the US-Mexico border in South Texas yesterday as he pushes a tougher message of restoring consequences for people crossing illegally, countering criticism from Republicans and some Democrats of President Joe Biden’s approach. Republican candidates endorsed by Donald Trump won their party’s nominations for governor in Pennsylvania and for the US Senate in North Carolina yesterday. Rising COVID-19 cases are driving up the use of therapeutics, with Pfizer Inc’s oral antiviral treatment Paxlovid seeing a 315% jump over the past four weeks, US health officials said on Tuesday. The increase in US cases and hospitalizations is starting to affect recommendations on behaviour, with New York City, the nation’s most populous city, advising stricter mask usage but stopping short of new mandates.

Markets

Stocks in Asia climbed this morning following a rally in US shares as investors assess the resilience of the global economy and hawkish comments from Federal Reserve Chair Jerome Powell. MSCI Inc.’s Asia-Pacific equity index rose for a fourth day, the longest such streak since February. US futures dipped and European contracts ticked up after the S&P 500 added 2% in a risk rebound yesterday. Chinese stocks were whipsawed by the nation’s Covid outbreak, pledges to ease up on a clampdown on technology giants and data showing sliding home prices. But they eventually traded little changed. Treasuries largely held an overnight slide, with the US 10-year yield just under 3%. The dollar was steady. Oil held around $113 a barrel and Bitcoin traded near $30,000. Rebounds in risk sentiment are proving fragile amid tightening monetary settings, Russia’s war in Ukraine and China’s Covid lockdowns.

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

10:15 a.m.: Denmark sells bonds
10:30 a.m.: UK March House Price Index
11:00 a.m.: Euro-area April CPI
11:00 a.m.: ECB’s Muller speaks
11:00 a.m.: Sweden to sell bonds
11:30 a.m.: Germany to sell bonds
12:00 p.m.: Portugal April PPI
12:00 p.m.: EU to sell bills
4:30 p.m.: EIA crude oil inventory report
6:00 p.m.: Russia 1Q GDP, weekly CPI
G-7 finance ministers and central bankers begin meeting in Bonn, Germany
Bloomberg Intelligence Market Structure 3.0 conference in New York

Corporate Events

Earnings include Tencent, Cisco, Lowe’s, Target, Analog Devices, TJX, Experian, Burberry

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