May 31, 2022

“UK business confidence rose in May for the first time in three months, with more firms planning to raise prices – euro-area CPI accelerated to 7.8% in May, up from 7.5%”

Tim Hallinan – Trading Director

Main Headlines

US President Joe Biden said the Federal Reserve has a primary responsibility to control inflation and vowed not to seek “to influence its decisions inappropriately” ahead of a meeting with the central bank chief scheduled today. The Fed is under pressure to decisively make a dent in an inflation rate that is running more than three times its 2% goal and has caused a jump in the cost of living for Americans. It faces a difficult task in dampening demand in the economy enough to curb inflation while not causing a recession. In a speech yesterday at Goethe University in Frankfurt, Germany Christopher Waller, a Fed governor, said he backed increasing interest rates by another 50 basis points “for several meetings” and would not stop that pace “until I see inflation coming down closer to our 2% target”. He also sought to dismiss fears that steep interest rate rises, along the lines he was advocating, would deliver a substantial hit to the jobs market and possibly trigger a recession.

A duo of Wall Street banks is warning on the “grim” outlook for the pound, predicting that stubbornly high inflation and an economic slowdown will precipitate further declines for the UK currency. The pound has lost ground against most key rivals this year, despite four UK interest rate rises since December as the Bank of England (BoE) began the process of tightening monetary policy ahead of other major central banks. The sharpest losses have come over the past six weeks as investors grow increasingly concerned about a cost-of-living crisis, which the BoE cautioned could push the UK into recession later in 2022. Sterling has steadied recently as a broad dollar rally goes into reverse but remains close to the lowest level since early 2021 against a basket of currencies of the UK’s trading partners. A recent investor survey by Bank of America showed the sharpest one-month drop in sentiment towards sterling in at least a decade, abruptly ending a period of relative optimism regarding the currency.

GBP

Sterling is weaker than most major currencies in the early morning trade. Sentiment among British businesses edged higher in May, except for consumer-facing companies that are most exposed to the growing cost-of-living crunch, a survey showed today. The Lloyds Bank Business Barometer rose in May to 38% from 33% in April, its first increase since February, despite worries about a slowing economy. The British public’s expectations for inflation have held stable this month, but at high levels that are likely to keep the Bank of England on alert about price growth risks. Public inflation expectations for the coming 12 months edged up to 6.1%, matching March’s record high, from 6.0% in April. Prime Minister Boris Johnson plans to bring back imperial measurements in time for the Queen’s Platinum Jubilee but has faced backlash from retailers who have warned that relabelling of goods will push up prices. He has also been accused of producing the policy in an attempt to distract the public from the “partygate” scandal.

EUR

The euro is stronger against sterling and weaker against the dollar this morning. EU leaders have struck a deal to ban most Russian oil imports as they seek to deprive Russia’s president Vladimir Putin of revenues to fund his war in Ukraine. The embargo, which was agreed after weeks of difficult negotiations, will include oil and petroleum products but contains a temporary exemption for oil delivered from Russia by pipeline. This was intended to grant Hungary, Slovakia, and the Czech Republic extra time to wean themselves off crude oil supplies from Russia. Turkish President Tayyip Erdogan told his Ukrainian counterpart Volodymyr Zelensky in a call yesterday that he would support a project to create a safe sea route for exporting Ukrainian agricultural goods. Western action to isolate the Kremlin has changed little for Russian citizens but signs of strain are beginning to appear – though unemployment figures have remained broadly stable, the number of jobs advertised has fallen 28% in April compared to the pre-war month of February.

USD

The dollar is well bid against most major currencies overnight. Corporate executives have this month bought shares in their companies at a rate not seen since the early days of the Covid-19 pandemic in what some Wall Street analysts said was an encouraging sign for the US stock market. Insider buying at S&P 500 companies has been the strongest since March 2020, and for the broader Russell 2000 index, there have been more insider buyers than sellers this month for the first time since March 2020. President Joe Biden has stated that the US will not send Ukraine rocket systems that can reach into Russia, following requests from Ukrainian officials for longer-range systems, including the Multiple Launch Rocket System (MLRS) that can fire a barrage of rockets hundreds of miles away. Biden did not rule out providing any specific weapons system, but instead appeared to be placing conditions on how they could be used. Biden and his team are working on a new package of military equipment, and it is expected to be announced in the coming days.

Markets

Stocks slipped and Treasuries sold off across the curve as oil jumped, adding to worries about how aggressive central banks will need to be in order to rein-in inflation without derailing growth. Europe’s Stoxx 600 Index is set to snap four days of gains, retreating from a one-month high, with technology stocks among the heaviest decliners. US futures erased their earlier advance. Treasury yields jumped, joining a selloff in German and European bonds. German inflation hit an all-time high, adding to pressure on central-bank policy makers to tame rising prices. The dollar advanced. Brent crude oil rose to above $120 a barrel after the European Union agreed to pursue a partial ban on Russian oil in response to the invasion of Ukraine. Higher energy and food costs are keeping upward pressure on prices globally and squeezing consumers. Global stocks are on track to end the month with modest gains amid scepticism about whether the market is near a trough and as volatility stays elevated.

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

8:00 a.m.: Sweden FSA presents Financial Stability Report
8:30 a.m.: Switzerland April retail sales
8:45 a.m.: France May CPI, April PPI, 1Q GDP
9:00 a.m.: ECB’s Villeroy speaks
9:00 a.m.: Hungary April PPI
9:00 a.m.: Turkey April trade balance; 1Q GDP
9:55 a.m.: Germany May unemployment
10:00 a.m.: Italy 1Q GDP
10:00 a.m.: Poland 1Q GDP
10:30 a.m.: Portugal May CPI
10:30 a.m.: UK April Mortgage Approvals, M4
10:30 a.m.: ECB’s Visco speaks
10:50 a.m.: ECB’s Makhlouf speaks
11:00 a.m.: Euro-area May CPI
11:00 a.m.: Italy May CPI
11:00 a.m.: Italy to sell bonds
11:30 a.m.: Germany to sell bonds
12:00 p.m.: Riksbank’s Ingves speaks
2:00 p.m.: Hungary central bank rate decision
2:00 p.m.: SNB’s Zurbruegg speaks

Corporate Events

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