Inflation fears haunt the markets


The week ahead sees a busy data calendar, especially in the United States, which has the release of the monthly employment data as well as the latest inflation report scheduled.

Gross Domestic Product is the major release in the UK, whilst Europe sees inflation and sentiment indicators released. Of course, geopolitical events will dominate, and hopefully, we will see some forward momentum in the peace process between Ukraine and Russia and risk sentiment will improve. Although not affecting the markets yet, there is a Presidential Election in France during April and soaring Covid infections in Europe factors that may soon concern investors. Closer to home, the markets will continue to digest Rishi Sunak’s budget whilst the ramifications from Brexit are never far from the front page. Finally, the week ahead may see some volatility midweek as we approach quarter-end and the rebalancing of portfolios after an extraordinary period of bond and equity price movement.

Relative calm returned to the currency market last week, with all the major currencies trading within a narrow range. Overall the direction of the G3 currencies followed risk sentiment when it improved sterling, and the euro rallied, and when it worsened, they drifted lower. The war in Ukraine played out in the background but had less impact on the currencies than the speeches of policymakers from the Federal Reserve. With the Federal Reserve sounding increasingly hawkish over the fight to control inflation, the derivative markets are giving a .5% upward move in interest rates after the next Fed meeting a better than 75% chance. The US bond markets also subscribe to this theory and ended a very volatile week with yields sharply higher. The Bank of England may also now be reassessing the timing and size of its next move after the disappointingly high inflation report published Wednesday. With the Bank of England and the Federal Reserve both looking to tighten policy, the odd one out remains the European Central Bank, limiting the euro’s upside potential for the time being.

The Bank of England, politicians, and the public had their worst fears confirmed last Wednesday with the publication of the UK’s inflation readings. As we are sure you know, the headline rate was the highest since March 1992, and worryingly it is yet to peak. With energy prices still yet to fully hit the indexes, it is not beyond reason to expect a double-digit headline figure over the coming months. The uptick places more pressure on the Bank of England, who have to explain in writing to Parliament when inflation tops 2%. With the inflation rate starting to run away, speculation is increasing that the Old Lady will hike rates more aggressively than they have recently, possibly by as much as .5% in line with expectations of the Federal Reserve’s moves. With rising interest rates, sterling should stay in demand against the euro; however, it feels like it is capped at its recent highs. This week looks set to be a quiet one for the data docket, with the main event being the release of the final reading of the Fourth Quarter Gross Domestic Product on Thursday. Also released will be Markit’s Manufacturing Purchasing Managers Index (PMI) on Friday. Several luminaries from the Bank of England are scheduled to give speeches this week including Governor Bailey later today and Ben Broadbent on Wednesday.

The euro is likely to stay under pressure from sterling and, in particular, the dollar until the European Central Bank signals that it is shifting policy to being less accommodative. This change is unlikely to happen whilst the bloc’s economies remain vulnerable to further energy price shocks due to the war in Ukraine. The single currency is also at risk of the side effects of a Russian default as several of its banks are deeply entrenched in the country. However, the euro is generally holding its ground, and it may be benefitting from all the bad news already being discounted. As we said earlier, geopolitics will drive sentiment this week, and we all hope that they take a turn for the better. It’s a quiet start to the week on the data front. The first interesting release is not scheduled until Wednesday when Business Confidence and Sentiment Indicators for the eurozone are released and Germany’s Consumer Price Index. Thursday sees German Retail Sales and Unemployment on the agenda, as well as the bloc’s Unemployment level. The week closes on a busy note with Eurozone Inflation published and Markit’s PMIs for Manufacturing. It is also a busy week for speakers from the European Central Bank, with Christine Lagarde and Fabio Panetta on the roster for Wednesday, followed by Phillip Lane on Thursday and Isabel Schnabel on Friday.

The Federal Reserve is becoming increasingly uncomfortable with the level of inflation in the United States. With it now touching 40-year highs and yet to peak, the language has become increasingly punchy, and many now believe that the Fed will hike the cost of borrowing by .5% at both their May and June meetings. On Thursday, the US will publish its Personal Consumption and Income reports which may lend even more traction to the argument for aggressive hiking of rates. Last week saw the lowest ever level of job seekers confirming that the economy is in rude health. In reality, there are millions of jobs unfilled in the economy. Unlike most other developed nations, this is a concern due to its potential impact on wages, leading to an inflationary spiral. The week ahead sees no less than three employment reports starting on Wednesday with ADP’s private-sector report, followed on Thursday by the weekly jobless number. As usual, the first Friday of the month heralds the publication of the latest US employment figures in the guise of the Non-Farm Payroll report. Also scheduled is Consumer Confidence tomorrow, Q4 GDP on Wednesday and ISM Manufacturing PMIs on Friday. Finally, just in case you didn’t miss that extra hour in bed on Sunday morning, a reminder that the US is back to being 5 hours behind Europe from today.