February 16, 2022

“UK inflation unexpectedly rose for a fourth straight month in January to 5.5%, both economists and the BOE had expected the figure to remain unchanged at 5.4%.”

Tim Hallinan – Trading Director

Main Headlines

President Joe Biden on Tuesday made an appeal for diplomacy to continue as the world watches to see if Russian President Vladimir Putin orders an invasion of neighbouring Ukraine, but also warned that a Russian attack on Ukraine will “be met with overwhelming international condemnation.” In a speech at the White House, Biden said to Russian citizens that the US and its allies are not a threat to them and that there’s “plenty” of room for diplomacy with Russia to avoid a conflict in Europe. After three hours of talks with German chancellor Olaf Scholz, Vladimir Putin, Russia’s president, said Moscow was drawing down some troops from border areas to enable “dialogue” with the west, while still keeping the threat of invasion hanging over its neighbour. Putin said he was prepared to negotiate on intermediate nuclear missile forces and confidence-building measures if the US and NATO agreed to discuss Moscow’s grievances with the transatlantic alliance, including its chief demand that it pledge to never admit Ukraine. The US and NATO have suggested that they were open to talks on arms control. They have rejected Moscow’s call to ditch the alliance’s open-door policy on membership. Both Scholz and Biden suggested that an acceptable compromise to all countries with a stake in Europe’s security, including Ukraine, was possible.

Inflation in Britain has edged up to its highest since March 1992. Earlier this month the Bank of England revised up its inflation forecasts to predict inflation will peak at around 7.25% in April, when a 54% rise in regulated household energy bills take effect, squeezing households hard. The British central bank does not expect inflation to return to its 2% target until early in 2024, although most economists think inflation will fall faster. The Bank of England has already raised interest rates twice since December, lifting rates to 0.5% from 0.1%, and financial markets expect a further rate rise to 0.75% or 1% on March 17 after the BoE’s next meeting. Higher energy prices have been the biggest single factor pushing up British inflation so far, although global pandemic-related supply-chain problems have raised the price of many other goods too. Britain’s cost of living squeeze has already seen a spike in prices across the board led by higher household bills but also including rising petrol, energy, and food costs. It is set to worsen in the spring after Ofgem announced an increase in the energy price cap, which will add around £700 on average to annual gas and electricity charges for millions of consumers.

GBP

Sterling is well bid against most major currencies overnight. Boris Johnson’s allies are increasingly confident he can avoid being fined over Downing Street parties held during coronavirus restrictions by arguing that he thought he was attending work events. The UK Home Office is pushing for sweeping new powers that would require internet companies to monitor for “legal but harmful” user content, in a radical departure from existing global rules that police some of the world’s biggest technology companies. Rolls-Royce is preparing to open talks with the Nuclear Decommissioning Authority about leasing disused nuclear sites as the UK group seeks to move ahead with plans to build a fleet of mini reactors. The UK is revamping its approach to biosecurity after Covid-19 exposed major shortcomings in its ability to respond to biological threats, including the coronavirus pandemic. The new approach will update Britain’s last biological security strategy, published in 2018, which warned of the need to “co-ordinate” government actions better and for a “truly comprehensive approach” to meet biological risks, including pandemics. The UK automotive industry has urged the government to set binding targets for installing electric vehicle charging points to give motorists the confidence to switch to battery models. Ministers have also been advised to set up a new regulator to oversee the rollout and monitor the network to ensure all parts of the UK have access to chargers.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. Russia’s defence ministry published a video that showed a column of tanks and military vehicles leaving annexed Crimea across a railway bridge after drills, adding that some troops would also return to their permanent bases. German Chancellor Olaf Scholz has been accused of weak leadership in the Ukraine crisis and being soft on Russia. Yet on his visit to the Kremlin on Tuesday, he not only stood up to Putin, but he also seemed to relish it. Political pundits wondered how the mild-mannered Scholz, who took office in December, would fare treading into “the lion’s den.” Russian officials have been known to publicly taunt or seek to outplay their visitors in a test of their mettle. Oil prices recouped losses after slipping more than 3% in the previous session, as investors gauged the impact of easing Russia-Ukraine tension against a taut balance of tight global supplies and recovering fuel demand. Meanwhile, Latvian flag carrier AirBaltic is setting up extra flights out of Kyiv this week to accommodate a passenger spike after European countries told their nationals to leave Ukraine or risk war. The Dutch government will lift most of its coronavirus restrictions as of Friday.

USD

The dollar is weaker than most major currencies in the early morning trade. US producer prices jumped more than expected at the start of the year, reinforcing the case for the Federal Reserve to remove the economic stimulus it has provided since the early days of the pandemic more rapidly. The producer price index, which tracks the prices businesses receive for their goods and services, rose 1 per cent in January, the Bureau of Labour Statistics said on Tuesday, the biggest gain in eight months. The White House is open to temporarily suspending the gas tax, after a high-profile group of Democratic lawmakers proposed scrapping the federal levy on petrol until at least next year in an effort to curb rising inflation. The move would be the latest in a series of efforts to help Americans struggling with rising inflation, just as coronavirus cases have been easing. Consumer prices are rising at the fastest pace in 40 years amid high demand and supply chain disruptions. Energy costs are seeing some of the biggest increases with gas prices up 40% from last year. The Defence Department on Tuesday released a report that says mergers and consolidation among its contractors pose risks to the US economy and national security.

Markets

Stocks rose Wednesday as traders weighed the prospect of diminishing tension over Ukraine and the risk of further twists after Russia said it was withdrawing some forces. Shares were up in Japan, Hong Kong, and China, where slowing inflation is boosting the central bank’s scope to ease policy to prop up growth. US futures were stable and European contracts rose after technology stocks helped the S&P 500 snap three days of losses. President Joe Biden said the US has yet to verify Moscow’s claims and an invasion remains possible, which the Kremlin has repeatedly denied. Oil was above $92 a barrel as traders assessed worries about potential disruptions to commodity supplies. Havens like longer-maturity Treasuries and gold that sold off in the past 24 hours largely maintained those losses. At the same time, other parts of global markets are flashing ongoing nervousness. Volatility gauges for both the S&P 500 and the Treasury market are sitting significantly above 12-month averages, a sign that traders remain on edge about risks such as the Ukraine standoff. Investors are continuing to fret about escalating costs and the likelihood of tightening monetary policy in places like the US and the UK, where inflation posted a surprise jump.

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

8:00 a.m.: U.K. Jan. CPI, retail price index, PPI
8:00 a.m. Norway 4Q GDP
9:00 a.m.: South Africa Jan. CPI
10:30 a.m.: U.K. Dec. house price index
11:00 a.m.: Euro area Dec. industrial production
12:00 p.m.: Israel 4Q GDP
12:00 p.m.: South Africa Dec. retail sales
3:15 p.m.: U.S. Jan. industrial production
4:30 p.m.: U.S. crude oil inventories
5:00 p.m.: Russia Jan. PPI
8:00 p.m.: FOMC minutes from Jan. 26 meeting
Zambia and Namibia rate decisions
NATO defense ministers meet through Feb. 17

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