January 20, 2022

“Indonesian and Malaysian central banks leave their policy rates unchanged ahead of key Federal Reserve meeting next week. Meanwhile, US Treasury yields jumped, and investors are confident that the Fed will soon tighten monetary policy in attempt to reduce inflationary pressure.”

Sam Cornford, Partner – Head of Trading

Main Headlines

President Biden said Wednesday that fighting inflation is the job of the Federal Reserve, tacitly endorsing the central bank’s shift toward higher interest rates. Consumer-price inflation hit a 7% annual rate in December, the highest in almost four decades. The surge in the cost of living triggered in large part by pandemic-related supply breakdowns and soaring demand for goods has proved longer-lasting than the administration, Fed or vast majority of economists anticipated. Fed policy makers are now phasing out their bond purchases and have signalled they will start raising interest rates as soon as March. The recalibration plans have sent Treasuries sliding, pushing up bond yields and driving down equities this month. Biden has seen his approval ratings tumble as a result, with a recent News poll finding that nearly two thirds of Americans believe the US is ‘doing badly’ on managing Covid, with Joe Biden’s pandemic handling at the lowest point of his presidency.

Conservative MPs are starting to “step back” and think twice about a leadership challenge against Boris Johnson. The Prime Minister has faced a defection and a demand to quit from one of his most senior MPs during a dramatic day in Westminster, with even allies of the prime minister warning the current situation cannot go on. The prime minister vowed to battle on in No 10 and his supporters insisted he now had the breathing space for a fightback, with many MPs awaiting the outcome of the Sue Gray inquiry. But Johnson faces a growing clamour from Tory backbenchers to buy their support in any confidence vote by ditching a £12bn-a-year tax rise this spring. A senior Conservative backbencher has warned his colleagues that they face a “year of agony” unless they trigger a vote of no confidence in Boris Johnson. Despite these major setbacks to his leadership, it appears that Mr Johnson’s position is safe for now at least, with many Tory MPs said to be reluctant to act before the findings of the lockdown party’s investigation are published.

GBP

Sterling is stronger against the dollar and weaker against euro this morning. England’s Plan B measures are to end from next Thursday, with mandatory face coverings in public places and Covid passports both dropped, Boris Johnson has announced. The prime minister also said the government would immediately drop its advice for people to work from home. Britain must learn to live with COVID-19 as it may be with us forever, health minister Sajid Javid said on Thursday, adding that Britain was moving ahead of other countries as the government lifted coronavirus measures. The health secretary has said COVID could be with us forever, but he hopes all restrictions can be lifted by March. UK households are feeling the squeeze from high rents and rapid house price growth, but the pandemic has dampened demand in London. The price of the average UK house increased 10% in the year to November 2021 to more than £270,000, according to data from HM Land Registry.

EUR

Euro is stronger against most major currencies overnight. The US State Department has cleared Lithuania, Latvia, and Estonia to send US-made missiles and other weapons to Ukraine, three sources familiar with the decision said, as President Joe Biden predicted Russia would move on Ukraine. Under export control regulations, countries must obtain approval from the State Department before transferring any weapons they received from the United States to third parties. Finland does not plan to join NATO soon but is ready to stand with its European allies and United States by imposing tough sanctions on Russia if it attacks Ukraine, Finland’s Prime Minister Sanna Marin said on Wednesday. The French far-right presidential challenger, Eric Zemmour, said he would seize back control of France’s borders from Europe, block European Union free trade negotiations and prevent any further enlargement of the bloc to the east. German prosecutors have opened an investigation into leaders of the co-governing Greens, Robert Habeck and Annalena Baerbock, over alleged special coronavirus payments.

USD

The dollar is weaker than most major currencies in the early morning trade. The president, Joe Biden, appeared to slip up when he replied to a question by saying the US and its allies have yet to agree on how to hold Moscow accountable over “a minor incursion.” White House aides were quick to clarify that any troop movement across the border would prompt a “swift, severe, and united response.” Biden and congressional Democrats suffered twin legislative defeats late on Wednesday in their push to toughen voting rights protections in the run-up to this November’s mid-term elections that will determine control of Congress in 2023. COVID-19 infections are reaching new peaks in the Americas with 7.2 million new cases and more than 15,000 COVID-related deaths in the last week. With democrats that elected him in 2020 unhappy, President Joe Biden has just a few months to try to chart a path out of the malaise or risk getting swamped in the looming midterm elections in which Republicans are seeking to regain control of Congress.

Markets

European stocks erased initial gains as the global sovereign-bond selloff paused and investors turned their focus to corporate earnings. Europe’s Stoxx 600 Index was slightly lower, while all three major US benchmarks were poised to advance. Miners outperformed, boosted by the rally in metals. Treasury yields dipped but remain higher for the week on concerns about elevated inflation and the prospect of Federal Reserve interest-rate hikes. A dollar gauge was little changed, crude oil slipped, and gold held around a two-month high. Chinese regulators are considering making it easier for builders to access certain funds from presold properties, a step that would help tackle the industry’s liquidity crunch. An index of property developer shares climbed. Separately, Chinese lenders lowered borrowing costs to boost the economy. Biden indicates that his $2 trillion economic agenda will have to be broken up, and said he isn’t ready to ease tariffs on China yet.

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

8:00 a.m.: Germany Dec. PPI
8:45 a.m.: France Jan. manufacturing, business confidence
10:00 a.m.: Norway deposit rates
11:00 a.m.: Euro area Dec. CPI
12:00 p.m.: Turkey one-week repo rate
1:00 p.m.: Ukraine key rate
1:30 p.m.: ECB Dec. policy meeting minutes
5:00 p.m.: EIA U.S. oil inventory report

Corporate Events

Earnings include Avanza, Sandvik, Suse, KeyCorp, American Airlines, M&T Bank, Regions Financials, Netflix

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