A week of reports and speeches ahead

This week we will see the release of many reports from all three major Central Banks, as the last few days of June and the start of July will bring about the usual burst of significant data.

President of the ECB Christine Lagarde is expected to have a speech every day Monday through Thursday to discuss the released data. Bank of England Governor Bailey is expected to speak on Wednesday as UK GDP Growth Rate reports will be released on Thursday. We will also see the release of Nationwide Housing Prices and BoE Consumer Credit reports on Thursday & Friday. The US is expected to have a packed week with multiple speeches from the FED, including FED Chair Powell on Wednesday. House Price Index, GDP Price, Growth & Sales are all expected to be handed to the public on Tuesday & Wednesday.

The Pound had an average display of strength last week, finishing slightly stronger against both the USD & EUR. The pound had some rather tricky data reports to navigate last week with UK inflation and retail data. Inflation was reported at a staggering 9.1%, up 0.1% from the April print. On Friday, we saw disappointing UK retail sales data with a decline in growth by -4.7%. Price action was relatively unphased as the cost-of-living squeeze is priced in.

The economic calendar is filled with high-impact events in the coming week focusing on inflation from both the U.S. and EU. EU inflation is expected to hold at 3.8%, but anything higher could trigger hawkish ECB bets and potentially push the euro higher. The aggressive outlook from the Fed is likely to negate any significant euro gains in the coming weeks. A series of important appointments for the Euro including Spanish and German inflation figures on Wednesday, which will inform market expectations for Friday’s Eurozone numbers, and retail sales data from Germany on Thursday. Economists and financial markets will be looking to see if April’s -5.4% month-on-month decline in German retail sales deepened last month and this point, along with the inflation data out on Friday, potentially has the ability to further impact expectations for ECB interest rates in the months ahead. Thursday’s German retail sales number will offer important insight into how Europe’s largest and generally most resilient economy is faring amid the commodity price shock but equally important will be whether this Friday’s Eurozone inflation figures follow in the direction of the UK’s and other central banks.

With the latest FED rate hike now in the rear-view mirror, the US Dollar fell for the first time in four weeks, dropping by -0.26%. EUR/USD rates increased by +0.61% while GBP/USD rates gained +0.44%. Many eyes will be watching the FEDs movements closely this week in anticipation of the data release, as the USD remains the current stable currency in a world of economic unease. Chairman Powell merely reiterated remarks already made in the press conference following June’s decision to lift the Fed Funds rate by a large 0.75% increment, taking it up to 1.75%, although they had a much more palpable impact on stock and bond markets last week than on their first iteration. All of this leaves a lot to be determined this week by the flurry of important economic figures due from the U.S. over the coming days, which includes the May edition of the Fed’s preferred measure of inflation; the Core Personal Consumption Expenditures Price Index. Consensus expects the Core PCE Price Index to rise by 0.4% for last month, up from 0.3% previously, but to fall from 4.9% to 4.8% in annual terms.

Inflation – Battling the rising cost of living

European stock markets are expected to open sharply lower this morning, continuing the global sell-off after red-hot inflation data in the US raised fears of aggressive Federal Reserve monetary tightening.

Following the data release, the dollar climbed to a near four-week high against a basket of currencies on Friday, after data showed U.S. consumer prices accelerated in May, strengthening expectations the Federal Reserve may have to continue with interest rate hikes through September to combat inflation. In fact, it’s going to be a big week for central banks, with the Federal Reserve widely expected to deliver a second 50 basis point rate hike on Wednesday. Investors will be watching closely to see what Fed Chair Jerome Powell has to say about future rate hikes after Friday’s much stronger than expected inflation data. The Bank of England is expected to deliver a fifth consecutive rate hike amid a mounting cost of living crisis.

The Bank of England was the first major central bank to start reversing its pandemic stimulus back in December but that did not stop U.K. inflation hitting a four-year high of 9% in April, almost five times the BoE’s 2% target. Following through with their roadmap, the BoE is widely expected to deliver what will be its fifth consecutive 25 bps rate hike since December on Thursday, despite a growing number of global central banks opting for half-point hikes. Nonetheless, the BoE expects inflation to exceed 10% later this year and Governor Andrew Bailey said in April the bank was walking a very tight line between tackling the surge in inflation and causing a recession.

It’s also a busy week for U.K. economic data, starting with GDP figures for April which will be released today and are expected to be flat. On the other hand, employment data on Tuesday is expected to point to continued tightness in the labour market, with unemployment seen declining while wage gains accelerate.

The possibility of a more aggressive hiking cycle later in the year is weighing on sentiment as the Eurozone economy struggles with slowing growth, exacerbated by the war in Ukraine, as well as rampant price increases. In fact, the euro lost ground on the prospect of the European Central Bank raising interest rates in a slowing economic environment. At her press conference on Thursday of last week, ECB President Christine Lagarde declined to give any concrete detail as to how the ECB intends to keep bond yield spreads within an acceptable range as it embarks on its first monetary tightening in 11 years. By contrast, she gave unusually detailed guidance about the path of interest rates, which may be 75 basis points higher by the end of September.

The Fed is all but certain to raise interest rates by another 50 basis points on Wednesday, adding to the 75 bps of rate hikes already delivered since March.  Friday’s hot May inflation data has revived fears that Powell could flag a faster pace of future rate hikes; data showed that U.S. consumer inflation jumped by 8.6% year-over-year in May, its biggest gain since 1981 with gasoline marking a record high and the cost of food soaring. This has prompted concern for investors that an aggressive push higher on interest rates could tip the economy into recession. In fact, market watchers will be keeping a close eye on Powell’s press conference after the policy meeting and on the Fed’s updated economic forecasts as well as its “dot plot”, which shows the projected outlook for interest rates.

The Perfect Storm in Sight

As the UK returns from a long weekend celebrating the Queens Platinum Jubilee, many headwinds are already setting the tone for the week ahead.

Prime Minister Boris Johnson will face a vote of confidence later today after the British leader was booed at various events over the past few days. Johnson, appointed prime minister in 2019, has been under growing pressure, unable to move on from a damaging report over parties held in his Downing Street office and residence when Britain was under strict COVID-19 lockdowns. If Johnson loses a confidence vote, he would be removed as prime minister and there would be a leadership contest to decide his replacement. In fact, there’s a growing risk the nation’s current account deficit, political turmoil, a deterioration of its relationship with the European Union over Northern Ireland and questions around the central bank’s credibility combine to create a “perfect storm.”

On the European front, equities ended last week on a negative note as data showed the U.S. economy added 390,000 jobs in May. This was more than expected and prompted investors to reassess the potential for rising interest rate hikes by the Federal Reserve in the months ahead. With this in mind, investors are keenly awaiting the release of Friday’s U.S. CPI report for May as this will act as a key input before the Fed decides how much to hike rates next week. Ahead of this, the European Central Bank meets on Thursday and is expected to use this get-together to make clear that rate hikes will be coming in the third quarter.

It’s not the first time in recent years Wall Street strategists have drawn parallels between the British currency and emerging markets. The comparison was made amid the UK’s torturous exit from the European Union, where political headlines whipsawed sterling as its behaviour broke from major peers.

Whilst not wishing to over-exaggerate GBP’s predicament as some kind of ‘end-of-days’ scenario, there are concerns that the increasing politicization of UK policy undermines the GBP in ways that would appear EM-like. There is a sense that something is changing in the UK, with the BOE increasingly hard to decipher and less transparent; a failure to discuss and acknowledge that Brexit has been a significant headwind to the supply side; and a sense that the BOE is losing control over its mandate.

In fact, the BOE has faced political attacks this month over its response to inflation, which is at its fastest rate in four decades. Despite four interest-rate increases since December and money markets bracing for more in each of its next five decisions, the pound is the third-worst performing major currency this year. At a point of increased uncertainty over domestic growth, signs of regional fragmentation and Northern Ireland-related risks, the UK will find it increasingly difficult to attract portfolio flows to finance a widening current-account deficit.

Top of the agenda for many market participants this week is Thursday’s meeting by the European Central Bank, which is expected to prepare the ground for an interest rate hike at its July meeting. While central banks around the world have begun their rate hike cycle, the ECB is seen as a step or two away from it. Eurozone inflation hitting record highs, though, has added more urgency to the discussion, and analysts expect this meeting to make clear that rate hikes will be coming in Q3. ECB president Christine Lagarde said as much in a blog post two weeks ago, so both the ECB statement and the press conference to follow will provide a chance for Lagarde to elucidate the road back to positive interest rates and to re-affirm the bank’s credibility. As of writing, market participants are currently pricing in a 125-basis point hike at the ECB’s four meetings this year. In fact, the EUR/USD rose 1.67% since the end of April and 3.55% from mid-May lows, suggesting the bank has re-won at least a little bit of that credibility with markets.

Friday’s U.S. CPI report for May comes a few days before the next Federal Reserve meeting and will act as a final input before the Fed decides how much to hike rates. Inflation is expected to come in at 8.3% year over year, while core inflation (excluding energy and fuel prices) is expected to come in at 5.9% year over year. The latter number would mark the third month of consecutive declines and make the case that core inflation may have peaked, which would echo the slower wage growth in last week’s jobs report. At the same time, the overall inflation number of 8.3% would be close to the peak and given the pain at gas pumps and grocery stores, consumers may take little solace in knowing the core number is levelling out.