Inflation Preoccupies the Financial Markets
Inflation continues to rise, and it dominated the financial market’s headlines for most of last week after the latest figures were released in the UK and the US. Both sets of inflation data touched fresh highs, indeed the highest levels for forty years. Initially, there was some relief that the US number was not as high as the markets had been prepared for, with second-hand car prices easing back, taking some of the sting from the number. With food prices rising as another consequence of the war in Ukraine and oil still volatile, the relief may be only temporary. Central banks, who had predicted that inflation was only a blip, still suggest that the peak of rising prices may be approaching soon. However, the markets are not convinced, and sharp rises in US interest rates look sure to start next month and continue through the rest of the year. The UK also is looking increasingly likely to raise rates after the next meeting of the Bank of England policymakers in two weeks, leaving the eurozone’s rates lagging behind.
This week looks quiet on the macroeconomic front, with little top-tier data to excite until Thursday’s eurozone inflation figures are released. Sadly once again, with no let-up in the war in Ukraine, it is looking likely that geopolitics will dominate proceedings, and investors are likely to continue to look for the safe haven that the dollar represents. Closer to home politics in France will continue to influence the euro’s direction as the battle for Presidency between Macron and Le Pen intensifies. Sterling may also be hurt by political uncertainty after both Boris Johnson and his chancellor Rishi Sunak were issued fines last week for breaking Covid rules. China is also experiencing an outbreak of Covid and implementing strict lockdown procedures, leading to further disruption to supply chains and heaping more pressure on prices. So potentially, a challenging week ahead of politics driving the markets.
The pound had a particularly strong week against the euro and ended it back towards its best levels against the euro that we saw earlier in the year. Sterling was primarily out of the limelight against the dollar in the run-up to Easter, but interest may be reawakened now that the school holidays are behind us. With inflation officially over three times the Bank of England’s target range, speculation has increased that it will now be forced to raise rates by .5% at its 5th May meeting. The Old Lady’s governor Andrew Bailey has two opportunities to explain his policies when he makes speeches on Thursday and Friday. He has been under attack recently and has an opportunity to state the Bank’s take on inflation. The only top tier data released in the UK will also be on Friday when March’s Retail Sales which are expected to have slipped again, and preliminary (flash) Purchasing Managers’ Indexes (PMIs) for Manufacturing and Services are all published.
The euro was again battered during the week against both the dollar and the pound and has opened under pressure this morning following the long holiday weekend. Last Thursday, the European Central Bank met for its monthly policy get together. During her press conference following the meeting, its President, Christine Lagarde, clearly acknowledged the upside risks to inflation and the downside risk to growth. By doing so, she all but admitted that the spectre of stagflation is looming in Europe. Unusually the press conference was being given from her home as she has Covid. Still, her tone and take on policy were as expected, with only a very gradual normalisation in prospect. In the build-up to the meeting, there had been some speculation that there would be little more than a commitment to end asset purchases at some point in the third quarter. With nothing new in policy terms emerging from the meeting or press conference, the euro looks likely to remain under fire against a backdrop of rising interest rates elsewhere. Whether this week’s release of the eurozone Consumer Price Index on Thursday changes the ECB’s stance, only time will tell. Also released are Industrial Production tomorrow and then Markit’s flash Services, Manufacturing and Composite Indexes on Friday. The only speaker scheduled this week is Christine Lagarde on Friday afternoon, who we all hope has recovered from her bout of Covid.
USD The dollar again had an impressive week pushed higher by the belief that the Federal Reserve will now act aggressively, unlike the ECB and possibly the Bank of England, to tame inflation by moving rates in .5% increments at least at its next two meetings. US yields also jumped higher last week, making the dollar still more attractive whilst its safe-haven status cemented its rise. The only major release is this afternoon’s Housing data, which is forecast to show signs of softening in the face of rising interest rates and dropping consumer confidence. The only other top tier data is the weekly jobless total on Thursday and, as elsewhere, Markit’s flash estimates of the Purchasing Manager’s Composite, Manufacturing and Services Indexes. Making up for the shortfall in data releases, there are plenty of speakers from the Federal Reserve to keep the markets occupied starting this afternoon with Charles Evans, who also speaks tomorrow alongside Mary Daly. Jerome Powell rounds the week off when he is scheduled to address an IMF global panel in his last speech before the next meeting of the Federal Reserve Open Market Committee.