Where’s the peak?
View from the Trading Desk:
Elevated commodity prices have been a primary driver of the record inflation levels in developed economies over the past few months. It makes sense that higher input costs for businesses—caused by a shift away from Russian energy and China’s zero covid policy—would eventually filter through to hefty price increases for consumers as firms look to preserve their profit margins. In addition, the war in Ukraine has added to the supply-driven shock in food prices, as wheat, corn and sunflower oil producers have to stockpile their harvests, unable to export to the rest of the world.
Last week, it was interesting to note some of the language used by the Bank of England’s Chief Economist, Hugh Pill, after the BoE raised headline rates by 0.25%. The policymaker commented that the central bank might be forced into more aggressive policy action if ‘the current high level of inflation is becoming embedded in pricing behaviour by firms’. It appears that BoE officials are concerned about the possibility of soaring price pressures becoming entrenched in other parts of the economy. This, in turn, makes Wednesday’s Consumer Price Index print more important in framing the argument for a 50bps interest-rate hike in August. The Bank of England expects UK inflation to peak above 11% around October this year, with UK consumers appearing more pessimistic about the effects of inflation on personal finances than any of their peers in other major economies.
Bottom line: We’d rather not sound too optimistic that we’re close to reaching peak inflation, but it’s worth noting that the Bloomberg commodity index has dipped over 8% since the 8th of June, having risen more than 28% Year-to-date. This could be another pullback before the next leg higher, but with aggressive monetary policy action prompting growth fears, we might see the demand for raw materials continue to decline. That could certainly provide some relief for the inflation outlook.
The week ahead
The Pound Index has fallen 0.70% over the last week. Expectations of further interest rate hikes by the Bank of England have kept the currency somewhat supported despite a myriad of negative sentiment for the UK. The BoE opted for a 25 basis-point rate hike at Thursday's meeting, taking the headline rate to 1.25%, the highest since 2009. Inflation is expected to worsen further in the coming months and reach a peak above 11%, while the UK economy is also projected to contract by 0.3% in 2022's second quarter. This news has dented consumer confidence, with pessimism on the UK outlook eclipsing many countries in Europe and across the world as Britons prepare for a decline in spending power.
- The Rightmove House Price Index gained again in June, adding 0.3%, taking the year-over-year rate to 9.7%.
- UK CPI and Core CPI y/y for May will be released on Wednesday. Analysts expect readings of 9.1% and 6.0%, respectively.
- Flash Manufacturing and Services Purchasing Managers’ Indices are forecast to read 53.8 and 53.0, respectively and will be published this Thursday.
- Closing out the week is Friday's release of Retail Sales m/m for May. The reading is projected at -0.6% versus 1.4% in April.
The Euro has been trading flat over the last week against the US Dollar, despite some hawkish monetary policy decisions out of the Federal Reserve. According to Governing Council member Mario Centeno, the European Central Bank will pursue normalised monetary policy at a gradual rate by balancing fragmentation risks with the central bank's main goal of combating soaring inflation. In the French legislative elections over the weekend, Emmanuel Macron failed to gain an absolute majority putting his policy objectives into question. This result pushed French bond yields higher this morning while European shares have opened up the week in the green.
- European Central Bank President Christine Lagarde will speak today at 2:00PM and 4:00PM at the European Parliament in Brussels.
- Germany's flash Manufacturing and Services PMIs are expected to read 54.0 and 54.6 upon their release on Thursday.
- German Bundesbank President Joachim Nagel is scheduled to speak today at 6:00PM and Thursday at 3:30PM.
- The German ifo Business Climate looks set to fall again on Friday, from 93.0 in May to 92.8 this month.
US Dollar strength has been a major talking point over the last few weeks as interest rate hikes by the Federal Reserve help support the Greenback. The Fed surprised markets on Wednesday by opting to hike rates by 75 basis points, which was the largest incremental hike since 1994. Fed policymaker Christopher Waller has voiced his support for another 0.75% hike in the July meeting, with markets now pricing in an implied policy rate of over 3.5% by the end of the year. This hawkish rhetoric helped push US stocks into a bear market last week, but JPMorgan expects these large moves to the downside to abate in the second half of the year as the Fed approaches peak hawkishness.
- Federal Open Market Committee member James Bullard is due to speak today at 5:45PM and this Friday at 12:30PM.
- Federal Reserve Chairman Jerome Powell will be testifying on Wednesday before the Senate Banking Committee and Thursday before the House Financial Services Committee.
- US Unemployment Claims for the week ending June 18th are forecast to be 225K.
- Flash Manufacturing and Services PMIs are expected to read 56.2 and 53.9 and will be released this Thursday.
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