Weekly Review 15th August 2022
Weekly Review
The market decided last week that inflation had peaked in the US after the Consumer Price Index and Producer Price Index were reported lower than the consensus expected. The markets in risk assets rallied, and the dollar fell as traders decided that sunnier times were ahead for the US economy and the Fed would moderate its tightening of policy. This change of heart seems strange when contrasted with the mood when CPI was first at these levels only a few months ago, and we feel that the euphoria is premature. It seems unlikely that the Fed will pivot its policy and back off from raising rates when the inflation level is so much higher than its target level. Friday’s Sentiment figures from the University of Michigan were better than expected, with inflation expectations dropping, but they won’t turn the Fed’s head. The dollar weakened as expectations of the Fed’s aggression have moderated, with only 50 bp of tightening now expected in September, down from 75bp. This may be wishful thinking, and it looks foolhardy to second guess the Fed ahead of their meeting at Jackson Hole, a further set of employment figures and more inflation data before they next meet.
Sterling and the euro both enjoyed better-than-expected weeks as the dollar backed away as fears over further aggressive tightening by the Fed eased. However, both sterling and the euro remain vulnerable as internal and geopolitical concerns continue. With gas supplies on the continent still threatened and a drought now also affecting river transportation and food prices, inflation is unlikely to retreat as quickly in the bloc as in the US. The UK is also facing higher energy costs and consequently higher inflation, which should keep pressure on the Bank of England to raise rates by a further 50 bp in September. In the week ahead, we get the monthly MOT on the UK economy with virtually a complete set of published macroeconomic data, which we discuss further in this note. The EU also has a busy week data-wise, and the US sees the release of last month’s FOMC minutes, which should shed further light on their continuing hawkishness.
As we said, it’s a busy week ahead for sterling data watchers with a full health check of the economy being published. The first data is published tomorrow when the Office for National Statistics releases Employment data, including earnings data which we will be watching closely for signs that the labour market is starting to ease. If the labour market is as tight as it has been recently, expectations will increase that the Bank of England will tighten, possibly the last upward move, by 50 bp in September. Arguably more importantly, though, inflation data is posted on Wednesday. The headline Consumer Price Index is expected to be near 10%, reflecting higher food costs which we are sure everyone is already aware of; with petrol prices starting to drop at the pump, there is some hope that we are approaching the peak of this current inflation cycle. The figure will help set the tone for sterling up to the next Bank of England meeting on 15th September. The last release of data is scheduled for Friday morning when Retail Sales for July are published, which will be studied to see how great an effect the recent interest rate rises are having on the high street.
Not such a busy week for the euro, but certainly plenty for the markets to digest in what is usually a lacklustre week with many European traders heading off to the beaches. We kick off tomorrow with the ZEW economic sentiment surveys for Germany, and the Eurozone will be followed on Wednesday with the bloc’s Employment and Gross Domestic Product on Wednesday. The week’s highlight arrives on Thursday when the Eurozone’s Inflation data is released. With President Putin still holding a stranglehold on Europe’s energy supply and the continent suffering a drought with many rivers running dry, tough times are ahead. In these unusual post-Covid times, many data releases are not as important as they used to be. However, the inflation data is still vitally important, and its level will set the mood for euro watchers for the immediate future,
Compared to the UK, the US data docket looks relatively bare, certainly compared with the UK’s plethora of data. The week starts with Industrial Production tomorrow, which analysts expect to show some decent growth with the oil exploration, understandably, giving the data a fillip. Whilst we are on the subject of oil, falling petrol prices should, on the one hand, dampen Retail Sales as it lowers forecourt income. Still, on the other hand, the consumer has more money in their pockets, which should translate into higher sales, making for an interesting figure. The other key event would be the release of the minutes from the last FOMC meeting, but with all and sundry from the Fed spouting hawkish rhetoric, we don’t think we are in for any surprises when they are released. Alongside the G3 currencies, Norges Bank (Norway’s Central Bank ) is meeting, and they are expected to follow on from June’s 50 bp increase in rates with a similar rise. The Reserve Bank of New Zealand is also meeting this week on Wednesday, and the consensus is for another 50bp rise. All in all an interesting week ahead for the markets, which may be a little more volatile due to many people going on vacation to enjoy the last of the summer sun before facing what is sure to be a tough winter ahead.
20220815
