May 3, 2022

“The Reserve Bank of Australia hiked rates by 25 basis points to 0.35% this morning – a larger hike than markets had forecasted. Meanwhile, financial markets await the US central bank on Wednesday to announce a half-percentage point increase in the Fed’s benchmark interest rate.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The US Federal Reserve is expected to accelerate its monetary policy tightening this week with its first half-percentage point rise since 2000 and signal more aggressive action to come until there is clear evidence that red-hot inflation is under control. Mounting inflationary pressures stemming from a tight labour market coupled with price increases extending beyond the sectors most sensitive to pandemic-related shocks and the war in Ukraine have obliged the Fed to speed up its withdrawal of stimulus, or risk falling further out of step. Federal Open Market Committee officials will convene on today for a two-day policy meeting, at which they are expected to raise rates for the second meeting in a row and formalize plans to shrink the Fed’s $ 9tn balance sheet. The central bank’s rhetoric has shifted notably since March, when it delivered its first interest rate increase since 2018, bringing the target range of the funds rate from near-zero to between 0.25 and 0.50 per cent.

The Bank of England is expected to raise interest rates to their highest level since 2009 on Thursday, as the central bank seeks to strike a balance between tackling record inflation and not taking action that would exacerbate the UK economic slowdown. Increasing rates from 0.75 per cent to 1 per cent would mean the BoE hits a self-imposed threshold to reveal next steps in its plan to reduce billions of pounds worth of assets built up over 12 years of quantitative easing following the financial crisis. Financial markets were expecting the BoE Monetary Policy Committee to raise rates by half a percentage point this week but have shown signs of revising their calculations down in recent days, with most economists now predicting a 0.25 percentage point increase. The consensus among economists is that the MPC will decide to move more cautiously as UK households are squeezed by inflation, leading to lower demand and slower economic growth.

GBP

Sterling is well bid against most major currencies overnight. Boris Johnson has joined a final push to convince chip designer Arm to list in London, as UK government officials grow concerned over the lasting damage if Britain’s best-known tech company chooses New York for its initial public offering. Boris Johnson has urged officials to revive plans, first announced seven years ago, to extend “Right to Buy” to England’s 2mn housing association tenants. At least 350 migrants have arrived in the UK after crossing the English Channel in the past two days, despite the British government’s new plan to fly thousands of asylum seekers to Rwanda. Britain said yesterday it would provide 300 million pounds more in military aid to Ukraine, including electronic warfare equipment and a counter-battery radar system, on top of around 200 million pounds of assistance so far. British oil and gas company, BP plc, expects to pay up to 1 billion pounds in taxes in Britain on its 2022 profits.

EUR

Euro is weaker than most major currencies in the early morning trade. Italy has unveiled a €14bn economic support package to help vulnerable families, businesses and investment projects cope with surging commodity prices and will increase a new windfall tax on energy company profits to fund the measures. Momentum was building yesterday behind attempts by French left-wing parties to form a united front against President Emmanuel Macron in next month’s parliamentary elections, after radical Jean-Luc Melenchon clinched a deal with the Greens. The sanctions imposed on Russia in response to its invasion of Ukraine will not be lifted until Moscow reaches a peace agreement with Ukraine, German Chancellor Olaf Scholz said, adding that it was for Ukraine to determine the peace terms. Meanwhile, Ukraine’s President Zelenskiy said that Russian Foreign Minister Sergei Lavrov’s suggestion that Nazi leader Adolf Hitler had Jewish origins showed that Moscow has forgotten, or never learned, the lessons of World War Two.

USD

The dollar is stronger against euro and weaker against sterling this morning. An effort by US Senate Democrats to move forward on President Joe Biden’s nominees for the Federal Reserve and Federal Trade Commission appeared headed for a second week of delay yesterday, after another Democratic lawmaker tested positive for COVID-19. High-growth technology stocks that sparkled in the coronavirus crisis have entered a bear market as shifting consumer habits and the prospect of sharp US interest rate rises force investors out of one of the most lucrative trades of recent years. Amazon workers at a second facility in New York have rejected efforts to form a union, dealing a blow to a grassroots labour movement that hoped to capitalise on momentum from its surprise victory at a larger warehouse last month. Massachusetts voters have soured on Joe Biden as a new poll shows that the president’s approval is dropping even in states where he won by the biggest margins against Donald Trump in 2020.

Markets

US stock-index futures swung between gains and losses at the European open as the force of dip-buying waned and concerns over a global wave of monetary tightening dominated. Contracts on the S&P 500 Index fell less than 0.1% after rising as much as 0.6%. Nasdaq 100 futures were also little changed. Europe’s Stoxx 600 Index advanced 0.2% even as UK equities tumbled. The UK’s 10-year gilt yield jumped above 2%, a day after the corresponding US rate climbed above 3%. In Australia, the central bank increased interest rates by more than many had expected, sparking a slide in bonds and a jump in the local currency. The nation’s three-year yield topped 3% for the first time since 2014. Next up is the Federal Reserve on Wednesday, which is poised for its biggest rate hike since 2000. The UK is expected to raise borrowing costs a day later.

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

8:45 a.m.: France March budget balance YTD
9:55 a.m.: Germany April unemployment
10:15 a.m.: Norges Bank statement on wealth fund
10:30 a.m.: U.K. April S&P Global/CIPS manufacturing PMI
11:00 a.m.: Eurozone March PPI
11:00 a.m.: Eurozone March unemployment
12:00 p.m.: Portugal March industrial production

Corporate Events

Earnings include Pfizer, AMD, KKR, Airbnb, Thomson Reuters, DuPont

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