Morning Report

July 14, 2022

“The risk that a historic 1 percentage point interest-rate rise from the Fed could plunge the US economy into a recession, coupled with damage to the European economy stemming from its dependence on Russian energy, has pressured the euro down to parity with the dollar for the first time in 20 years.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The Federal Reserve is under pressure to abandon its monetary policy guidance for the second month in a row in the face of soaring inflation, as market participants increasingly bet the US central bank will raise interest rates by a full percentage point at the end of the month. Consumer prices rose again in June at a speed that pushed the annual increase to 9.1%, the biggest jump since November 1981. The advance surpassed even the most aggressive forecast by economists and was yet another unwelcome development for a central bank that has emphasised its “unconditional” commitment to tackling high prices — even at the expense of the economic recovery. It also threatens to further muddy the Fed’s communications with investors, given that policymakers had sent clear signals to markets that they intend to raise interest rates by 0.5 or 0.75 percentage points at their next meeting, which concludes on July 27. But following June’s inflation report, economists now expect the Fed to implement a 0.75 percentage point increase at the bare minimum.

Former chancellor Rishi Sunak and trade minister Penny Mordaunt emerged as frontrunners in the race to be the next Conservative party leader yesterday, as MPs prepared to further narrow the field. Mordaunt, the dark horse in the Conservative leadership campaign, launched her bid to become prime minister with a promise to return to old Tory themes of “low tax, a small state and personal responsibility”. However, Sunak has insisted tax cuts cannot be implemented until surging inflation has been brought under control. Sunak has made himself unpopular with some Tory MPs, including right-wingers, by raising taxes to pay for the Covid-19 crisis and improvements to public services. But his campaign was boosted by an endorsement from Jeremy Hunt, who praised the former chancellor for his economic record and “standards of integrity”. Meanwhile, Liz Truss, who came third in the first round of voting amongst Conservative party members, pledged to continue Johnson’s levelling-up agenda to tackle the UK’s regional inequalities, but “in a Conservative way”.


Sterling is stronger against the euro and weaker against the dollar this morning. The UK economy returned to growth in May after a contraction in April, surprising economists and raising analysts’ expectations of a significant interest rate rise by the Bank of England at its next meeting. Output grew 0.5% between April and May, figures from the Office for National Statistics showed yesterday – much better than the flat performance expected by economist. With gross domestic product figures for the previous months also being revised up to a 0.1% expansion in March and a milder 0.2% contraction in April, Paul Dales, chief UK economist at Capital Economics, said the data suggested “that the economy is holding up well in the face of high inflation”. Britain’s railways face more disruption after the RMT union announced yesterday that it would hold another strike this month. It rejected a “paltry” pay offer from the industry and vowed to continue the dispute “for as long as it takes”.


The euro is weaker than most major currencies in the early morning trade. Italian Prime Minister Mario Draghi’s coalition government appears close to collapse today after the 5-Star Movement, one of its members, said it would not take part in a parliamentary confidence vote. Other coalition parties have warned that they will quit the government if 5-Star boycotts the vote in the Senate which is due later in the day, while Draghi himself said this week that he would not head an administration without the 5-Star on board. Russia and Ukraine have made “very substantive progress” on a plan to avert a global food crisis by securing the safe passage of millions of tonnes of grain through the Black Sea, the head of the United Nations said. Guterres suggested a final deal could be reached as soon as next week when a second round of UN-backed negotiations is due to take place.


The dollar is well bid against most major currencies overnight. The annual rise in the consumer price index beat economists’ forecasts of an 8.8% increase, reaching 9.1%, and triggered a sell-off in US stocks and Treasury bonds. Prices jumped another 1.3% between May and June, following a 1% rise in May. Once volatile items like food and energy are stripped out, “core” inflation edged up from 0.6% to 0.7%, leaving an annual increase of 5.9%, slightly down on the 6% recorded the month before. In response, the Biden administration, which has been feeling the heat from the surge in inflation, tried to play down the rise, arguing it covered the period before prices for energy and other commodities dropped sharply. Joe Biden arrives in Riyadh on Friday with a plan to bring down oil prices by convincing Saudi Arabia to pump more oil, especially to Europe, whilst capping the price at which Russia can sell its crude. However, oil executives and market analysts say both parts of the plan are fraught with difficulty and could even goad Russia into pushing its prices up.


US equity futures fell along with stocks in Europe and the dollar resumed its advance today after high US inflation hardened expectations for more aggressive Federal Reserve monetary tightening that could trigger a recession. The Stoxx Europe 600 index declined, dragged down by the telecom sector, where Ericsson AB plunged more than 10% after missing analysts’ profit estimates. S&P 500 and Nasdaq 100 contracts retreated ahead of the US second-quarter earnings season, kicked off by JPMorgan Chase & Co. and Morgan Stanley. An Asian share index dropped for the third time in four days. Traders have shifted toward expectations of a historic one percentage-point Fed interest-rate hike later this month after the US consumer-price gauge clocked a 9.1% annual climb. Fed Bank of Atlanta President Raphael Bostic said “everything is in play” to combat price pressures. The dollar pushed higher, hovering around the highest level in more than two years. Treasury yields climbed, led by two-year maturities that are more sensitive to imminent Fed moves.

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

8:00 a.m.: Sweden June CPI
8:30 a.m.: Switzerland June producer & import prices
9:00 a.m.: Hungary one-week deposit rate
9:00 a.m.: Turkey May industrial production
11:00 a.m.: European Commission publishes summer economic forecasts
12:00 p.m.: Ireland June CPI
2:30 p.m.: US weekly jobless claims
3:00 p.m.: Russia Gold and FX Balance
4:00 p.m.: ECB’s Centeno speaks

Corporate Events

Earnings include Ericsson, EQT, VTB Bank, JPMorgan, Morgan Stanley, TSMC


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