May 26, 2022

“The US dollar is trading close to a one-month low this morning, as minutes from the most recent Federal reserve’s meeting point to a pause rate hikes after possible increases in the next two months.”

Sam Cornford, Partner – Head of Trading

Main Headlines

Federal Reserve officials discussed the possibility of moving the US central bank to a “restrictive” policy stance that would better fight inflation through more aggressive interest rate increases, but worried that this could undermine the strong recovery in the jobs market. According to minutes of the most recent Federal Open Market Committee meeting held in early May, most US monetary policymakers agreed on the need to keep increasing the Fed’s main interest rate, set at a range of between 0.75 per cent and 1 per cent, by 50 basis points. This would match the Fed’s goal of “expeditiously” getting interest rates back up to a neutral setting, where it is neither boosting nor stunting the economy. Fed officials, including chair Jay Powell, are trying to engineer what they have described as a “soft” or “softish” landing to bring down inflation without triggering a recession.

Rishi Sunak will today announce an emergency multibillion-pound package of support for British households facing spiralling domestic energy bills this autumn, partly funded by a windfall tax on energy companies. Those briefed on the UK chancellor’s thinking said the government support could be worth more than £10bn and will be primarily focused on the poorest households and pensioners, although the “squeezed middle” will also receive help. Sunak could also offer help to all households by turning his February plan to offer a one-off universal loan worth £200, deducted from energy bills in October and repayable at £40 a year over five years, into a grant. Although many Tory MPs will be delighted that Sunak is acting to alleviate the cost-of-living crisis, some on the right are furious that he is planning a windfall tax raising several billion pounds to help pay for it.

GBP

Sterling is well bid against most major currencies overnight. Growth in UK manufacturing and services activity has plunged to a 15-month low, fuelling the risk of a recession. Business activity has hit its lowest level since January 2021, when the country was in full lockdown. Boris Johnson emerged damaged but unbowed on Wednesday after the publication of a damning report into a culture of drinking and lawbreaking in Downing Street during the Covid-19 pandemic. Johnson accepted “full responsibility” for the parties and drunken behaviour that took place under his own roof in 10 Downing Street but insisted that he would not quit. “I am humbled, and I have learned,” he told MPs. The UK government will review the acquisition of the country’s largest semiconductor plant by a Chinese company in a significant shift in approach to foreign takeovers.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. German home prices will rise faster this year than thought only three months ago, as a supply shortage outweighs a deepening cost of living crisis and the prospect of higher interest rates. Turkey will not be rushed to drop its opposition to moves by Sweden and Finland to join NATO by next month when leaders of the alliance’s member states meet for a summit in June, a senior adviser to President Recep Tayyip Erdoğan said. Russian President Vladimir Putin is hiking the country’s minimum wage and pensions by 10% to help counter soaring inflation amid hard-hitting sanctions over the Ukraine war. Meanwhile, Brussels is in search of to clear authorized blocks impeding the confiscation of Russian oligarchs’ property as a part of efforts to tighten the enforcement of its sanctions regime.

USD

The dollar is weaker than most major currencies in the early morning trade. Stellantis and Samsung will build a $2.5bn battery plant in Indiana, as the parent group of Chrysler and Fiat accelerates its electric vehicles shift in the US after lagging behind its peers. The Biden administration made a revised proposal yesterday to ban the disposal of mining waste in Alaska’s Bristol Bay watershed, dealing a potential death blow to the contentious Pebble Mine project that has been pursued for over a decade. While the Biden administration signalled that it was again considering limits to US oil exports to curb high fuel prices, analysts do not think it will make any policy changes as long as the Russian energy crisis looms. The Department of Energy said yesterday that the administration is focused on “working closely with our with our partners and allies to mitigate the effects” of the Russian war in Ukraine.

Markets

Stocks were mixed this morning as traders weighed Federal Reserve minutes that struck a less hawkish note with downbeat remarks on China’s economy by Premier Li Keqiang. Energy shares led an advance in Europe’s Stoxx 600 as oil rose. Technology shares underperformed, following moves lower in Asia, while futures on the S&P 500 and Nasdaq 100 slid. Treasuries advanced and the dollar was steady. Fed policy makers indicated their aggressive set of moves could leave them with flexibility to shift gears later if needed. Investors took some comfort from the Fed minutes that didn’t show an even more aggressive path being mapped to tackle elevated prices, though central banks remain steadfast in their resolve to douse inflation. Still, volatility has spiked as the risk of a US recession, the impact from China’s lockdowns and the war in Ukraine simmer.

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

9:00 a.m.: Hungary one-week deposit rate
9:30 a.m.: Russia central bank decision
10:00 a.m.: Italy May consumer confidence, economic sentiment
11:00 a.m.: Italy sells bonds, linkers
1:00 p.m.: Turkey one-week repo rate
2:30 p.m.: US weekly jobless claims, 1Q GDP
7:30 p.m.: ECB’s Centeno speaks
ECB’s de Cos speaks

Corporate Events

Earnings include Medtronic, Man United, Gap, Marvell, Farfetch, Alibaba, Macy’s, Dollar Tree

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