July 14, 2021

“Yesterday’s Consumer Price Index release, which registered the highest 12-month increase since August 2008, pushed the dollar to a three-month high against the euro. Inflation has consistently been called transitory in the US but is clearly becoming a test for central banks in major economies. Market participants will be watching closely for any mention of tapering as the Fed’s Chairman Jed Powell testifies before Congress on Thursday.”

Sam Cornford, Partner & Head of Trading

Main Headlines

The pace of inflation measured by the US Consumer Price Index has picked up again with a jump of 5.4% on a representative basket of goods and services meant to model US consumer spending. This unexpected rise in the consumer price index across June has challenged the Federal Reserve and White House stance that inflation will be temporary. Economists had forecast a 4.9% jump previously. Month on month, the Bureau of Labor Statistics estimates a 0.9% price rise in the CPI. Investors, economists and policymakers are scrutinising the rise in the CPI with caution due to risks that an ultra-accommodative fiscal policy is causing prices to spiral.

UK inflation rose higher than expected for a second month in a row, climbing to 2.5% from a year earlier. Increasing from a rate of 2.1 per cent in May, consumer prices have accelerated at the fastest rate since August 2018. Higher commodity prices contributed to the increase through rising costs at petrol pumps, but the causes of the increase in inflation in June were widespread with only healthcare services acting as an anchor on the rate. The jump strengthens the view that the central bank will be forced to raise interest rates as soon as next year.

GBP

Sterling is well-bid against most majors overnight. The government saw off a rebellion on cutting the overseas aid budget by $4bn on Tuesday, defeating Theresa May’s opposition by 333 votes to 298. Senior Conservatives such as the former PM, Andrew Mitchell and Sir John Major have stressed that by deviating from the aid target of 0.7% of Gross National Income the UK is reneging on its responsibilities to the world’s poorest nations. UK employers are planning the lowest job cuts for over six years, as the economy reopens. Redundancy figures for June from the Insolvency Service saw 15, 661 positions put at risk in Great Britain.

EUR

The euro is higher against the dollar and lower against the pound in early morning trade. Angela Merkel will make her last foreign trip to the United States as Chancellor of Germany, with NATO, China, Russia and Europe’s Nord Stream 2 oil project set to be key agenda items. Principally, Volodymyr Zelensky’s claim that the NS2 oil project threatens Ukraine and undermines European security will be discussed. The European Central Bank is set to announce plans to press ahead with the development of a digital currency for the bloc. In Brussels, Ursula Von der Leyen is preparing legal proceedings against Poland and Hungary over each countries’ domestic package of anti-LGBTQI+ legislation.

USD

The dollar is lower against most majors overnight. Democrats in the US Senate have agreed a $3.5 trillion deal on spending for outlays related to climate change, childcare and education in the United States. In a move that could circumvent Senate Republicans, Democrats will push ahead passing legislation in a bid to support Biden’s economic agenda before mid-term elections in 2022. The State Department is due to warn US companies over privacy and data laws imposed by the Chinese government 0n multinationals based in Hong Kong. A new law will allow Beijing more control over financial assets and information of foreign companies in Hong Kong.

Markets

Most Asian stocks fell Wednesday. Treasuries pared a decline as investors evaluated a surprise U.S. inflation jump that stirred the debate on how long Federal Reserve policy can stay ultra-loose. Shares fluctuated in Japan and retreated in Hong Kong and China, though the moves were generally modest. S&P 500 futures edged down after the index slipped from a record. Nasdaq 100 contracts were steady. U.S. releases overnight showed the highest inflation since 2008, as well as mixed earnings from JPMorgan Chase & Co. and Goldman Sachs Group Inc. The 10-year U.S. Treasury yield eased to about 1.4% and the dollar trimmed earlier gains. The Treasury yield curve was volatile overnight: a flattening move following the inflation data reversed as weak demand at a 30-year bond auction drove yields on this maturity higher. The New Zealand dollar jumped after the country’s central bank said it would end quantitative easing this month.

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

8:00 a.m.: U.K. June CPI, RPI, PPI

9:00 a.m.: Spain June CPI

10:30 a.m.: U.K. May house price index

11:00 a.m.: Euro-Area May industrial production

11:30 a.m.: Germany sells bonds

1:00 p.m.: Russia sells bonds

1:00 p.m.: Turkey rate decision

2:45 p.m.: ECB’s Schnabel speaks

4:30 p.m.: EIA crude oil inventory report

6:00 p.m.: Fed’s Powell testifies

7:00 p.m.: BOE’s Ramsden speaks

EU’s von der Leyen, Hahn give press conference; Vestager discusses digital levy

EU proposes new measures under its Green Deal

France celebrates Bastille Day: Financial markets remain open

Corporate Events

Earnings include BofA, Wells Fargo, Citi, BlackRock

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