May 4, 2023

“The US central bank raised its benchmark interest rate by 0.25% to 5.00%-5.25%, however they also dropped the language stating further rate increases would be necessary. Today, the European Central Bank is expected to raise its benchmark rate by 25 basis points due to declining core inflation and tighter financial conditions.” 

Sam Cornford, Partner – Head of Trading 

Main Headlines 

The White House Council of Economic Advisers published an analysis indicating that a prolonged default on U.S. payment obligations may result in the elimination of 8.3 million jobs and a 6.1% reduction in economic output. The council stated that such an unparalleled default could cause considerable harm to the economy, resulting in a shift from strong job growth to millions of losses. In other news, The Fed raised rates by 25 basis points, suggesting it may be the last tightening move of the cycle. Although there is a possibility of a mild recession, modest growth is still predicted. The fed funds rate reached a 16-year peak of 5%-5.25%, which the Fed considers to be close to a restrictive level.  

Bank of England data released today shows that in March, British lenders granted 52,011 mortgages for house purchase, the highest since October. The figure is a significant rise from February’s 44,126 approvals and higher than the previous predictions by economists. However, net mortgage lending in March only increased by £18 million, far lower than the expected amount. Meanwhile, British new car registrations continued their growth streak, rising over 10% YoY in April, marking the ninth consecutive month, according to preliminary data released by SMMT on Thursday 

GBP 

Sterling is well bid against most major currencies overnight. Britain’s services sector grew at its quickest rate in a year in Q2 due to new orders, but consumers bore the brunt of rising wage bills. The final S&P Global/CIPS UK Services Purchasing Managers’ Index (PMI) increased to 55.9 from March’s 52.9, surpassing both the growth threshold of 50 and the preliminary reading of 54.9. This Thursday’s reading adds to a string of positive economic indicators, countering the possibility of a recession in early 2023 and putting more pressure on the Bank of England to continue raising interest rates. 

EUR 

The Euro is weaker than most major currencies in the early morning trade. European equities opened lower as traders anticipated an interest rate increase from the European Central Bank, following the US Federal Reserve’s signal of a potential pause in aggressive inflation-curbing policies. They are expected to raise rates by a quarter-point to 3.25%, a slowdown from consecutive half-point rises this year. Eurozone inflation rose to 7% YoY in April, the first increase in six months, while core inflation decreased for the first time since June 2022. However, Eurozone business activity growth accelerated in April, with robust services offsetting a manufacturing downturn, according to a survey. HCOB’s Composite Purchasing Managers’ Index (PMI), a reliable indicator of overall economic health, rose to an 11-month high, marking the survey’s fourth consecutive month above the 50 growth/contraction threshold. The bloc’s dominant services industry also saw a one-year high PMI, surpassing March’s figures, albeit lower than the initial flash estimate. The survey revealed that inflation had dropped to its lowest level in over two years. 

 USD 

The Dollar is stronger against the Euro and weaker against Sterling this morning. The Bureau of Economic Analysis will release the Quarterly Trade Balance report, which measures the value difference between imports and exports of goods and services for the reported month.  Jerome Powell, the Chair of the Fed, stated “The Fed’s latest statement removed the previous guidance on additional monetary tightening and emphasized their policy approach would depend on economic data,” after the policy decision. He added that the committee still expected inflation to take time to reach its target range, and cutting rates would not be appropriate if inflation followed the forecast. While the changes to the Fed’s statement could indicate the end of the current tightening cycle, analysts hold mixed opinions on the likelihood of imminent easing while inflation persists. In other news, today’s weekly Unemployment Claims report will be released. The anticipated forecast is 239K, but recent weeks have shown higher than expected numbers, and it’s unclear how this continuing trend will play out. 

Markets 

European stocks dropped as investors studied a slew of earnings for clues on the state of the economy and prepared for a rates decision from the European Central Bank later Thursday, following the Federal Reserve’s latest quarter-point hike. The dollar extended a decline. Energy shares were the only European sector posting gains, with Shell Plc climbing after it maintained the pace of share buybacks and reported another strong quarterly profit despite lower oil and gas prices. 

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

8:00 a.m.: Germany March Trade Balance
10:00 a.m.: HCOB Euro-Area Composite/Services PMI
10:00 a.m.: Norway Rate Decision
10:30 a.m.: UK March Mortgage Approvals
10:30 a.m.: UK April S&P Composite/Services PMI
11:00 a.m.: Euro-Area March PPI
2:15 p.m.: ECB Rate Decision
2:30 p.m.: US March Trade Balance; Initial Jobless Claims
2:45 p.m.: ECB’s Lagarde speaks 

Corporate Events 

Earnings include:  

Shell, Maersk, BMW, Ferrari, Infineon, Apple, AIG, Blue Owl, Block, Dropbox, Datadog, Carlyle, Coinbase, Datadog, ConocoPhillips, DoorDash, Expedia, Booking, Hyatt, Kellogg, Lyft, Microchip, Moderna, PG&E, Paramount, Peloton, Zoetis 

Bloomberg Intelligent Automation roadshow in New York 

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