Morning Report

July 21, 2022

“All eyes today will be on the European Central Bank as policymakers are expected to announce the first interest rate hike in more than a decade – Christine Lagarde’s speech this afternoon will provide hints as to whether September’s move might be 25 or 50 bps.”

Tim Hallinan – Trading Director

Main Headlines

The US and Canada are seeking trade dispute talks with Mexico over the country’s nationalist energy policies, which they argue have undermined international companies investing in clean energy. Washington accused Mexico of failing to meet its obligations under the US-Mexico-Canada Agreement (USMCA) by favouring state-run utility Federal Electricity Commission (CFE) and oil company Petróleos Mexicanos (Pemex). This came at the expense of US and other private firms that have poured billions of dollars over the past decade into the clean energy sector in Mexico, it said. The complaint brought by the US accuses Mexico of restricting market access, failing to protect investment and pushing policy changes that curb the use of clean energy from private producers. The US statement takes aim at, among other things, a 2021 change in Mexico’s electricity law that gives priority to power generated by the CFE — including from its coal-fired plants — over renewables such as wind and solar, which are produced by private companies.

UK interest payments on government debt jumped to the highest level on record last month in a sign of the limited fiscal space available for tax cuts. Debt interest payments rose to £19.4 billion last month, £10.3 billion more than in June last year and the highest since records began in 1997, reports the Office for National Statistics. A quarter of the UK’s government debt is index-linked, so the cost of servicing it is pushed up by inflation, which is running at a 40-year high. The interest payments were about double the previous record in June 2021, reflecting soaring prices over the past year as well as temporary factors including the ways debt payments are accounted for. Interest payments are likely to remain high by historical standards beyond June. Last month the OBR noted that with the Bank of England expecting inflation to hit 11% this year “debt interest can be expected to continue to overshoot our forecast”. Public sector net borrowing was £22.9 billion in June, £4.1 billion more than in the same month last year.


Sterling is stronger against the dollar and weaker against the euro this morning. British Prime Minister Boris Johnson bowed out of his final showpiece parliamentary appearance with a round of applause from his party, jeers from opponents and an enigmatic exit line: “Mission largely accomplished … hasta la vista, baby.” After 10 days of brutal political combat at Westminster, former chancellor Rishi Sunak and foreign secretary Liz Truss will now take their fight to be Britain’s next prime minister to the country. Some Tory MPs fear the worst. Such has been the acrimony between the candidates in the race to succeed Boris Johnson as Conservative leader and prime minister that Labour has made an “attack ad” relying on their trashing of his government’s record. Sunak has accused Truss of advocating “socialist” plans to borrow to fund tax cuts; she claims her rival’s tax increases have driven Britain towards recession.


The euro is well bid against most major currencies overnight. Italian financial markets sold off on Thursday as Prime Minister Mario Draghi’s government teetered on the brink of collapse. The sell-off in Italian debt heightened the stakes for the European Central Bank as it prepared to raise interest rates at its policy meeting on Thursday for the first time since 2011. Economists widely expect the central bank to increase borrowing costs by 0.25 percentage points from their current level of minus 0.5%, but rate-setters were also poised to discuss a possible 0.5 percentage point rise. Analysts also expected the ECB to shed light on a mooted “anti-fragmentation” tool aimed at limiting divergence in borrowing costs between the eurozone’s strongest and weakest nations — a challenge heightened on Thursday by the expanding Italian yield spread. Ukrainian President Volodymyr Zelenskiy on Wednesday dismissed a seventh round of European Union sanctions against Russia, which is currently being finalized, as inadequate.


The dollar is weaker than most major currencies in the early morning trade. President Joe Biden said the Pentagon did not support a planned visit to Taiwan by Nancy Pelosi, following reports that the Speaker of the House of Representatives was set to become the most senior US politician to visit the country in 25 years. Pelosi will lead a delegation of lawmakers to Taiwan, Japan, Singapore, Indonesia, and Malaysia. The group is also expected to visit US Indo-Pacific Command in Hawaii. China this week said it would respond with “strong measures” if Pelosi went ahead with the visit to Taiwan, a democratically ruled country over which Beijing claims sovereignty. The US House Speaker is the second in the order of presidential succession, giving a visit particular prominence. US President Joe Biden said on Wednesday that climate change is an emergency but stopped short of a formal declaration, announcing a modest package of executive actions, and promising more aggressive efforts.


US stocks rose in a volatile session as investors parsed the latest corporate news and the potential for geopolitical risks in Europe. The dollar gained, while the euro fell as Italy’s government looked set to collapse. The S&P 500 posted its first back-to-back gain in almost two weeks, with advances in tech and consumer discretionary stocks offsetting declines in defensive sectors, utilities, and health care. Tech stocks briefly pared their advance after Google said it will pause hiring for two weeks. Stocks advanced for third day in four amid optimism over the earnings season and growing speculation markets may have bottomed out. While that debate continues, with Sanford C. Bernstein strategists saying markets have yet to see full capitulation, rates markets have discarded bets the Federal Reserve will hike rates by a full percentage point next week, bolstering optimism the central bank will take a more measured approach to policy tightening.

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

8:00 a.m.: UK June public finances (PSNCR)
8:00 a.m.: Norway 2Q industrial confidence
8:45 a.m.: France July business confidence
9:00 a.m.: Switzerland June M3
9:00 a.m.: Hungary one-week deposit rate
10:00 a.m.: BOE’s Pill speaks
10:30 a.m.: Spain to sell bonds
11:00 a.m.: UK to sell bonds
11:00 a.m.: Hungary to sell floating bonds, bills
11:50 a.m.: France to sell linkers
1:00 p.m.: Turkey rate decision
1:00 p.m.: Ukraine rate decision
2:15 p.m.: ECB rate decision
2:30 p.m.: US weekly jobless claims
2:45 p.m.: ECB’s Lagarde gives press conference

Corporate Events

Earnings include Roche, SAP, ABB, Thales, Nokia, Givaudan, Sartorius, Danaher, AT&T, Philip Morris, Blackstone, American Airlines, Snap

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