UK markets continue to wait for the Tory leadership campaign to run its course. With inflation jumping in the US to 9.1%, traders will be primed for the UK inflation reading with expectations for another rise to 9.3%.
Review of last week’s key action
Central banks continue to play catch up. Last week the Reserve Bank of New Zealand raised rates by 0.5% whilst the Bank of Canada surprised the markets with a whopping 1% hike – from 1.5% to 2.5% on the official overnight rate.
FTSE -10 -0.13% DOW -92 -0.29% S&P -39 -1% NASDQ -143 -1.17% DAX -107 -0.82% NIKKEI +178 +0.67% Hang Seng -1,400 -6.44%
Equity markets rallied last Friday off the back of some optimistic data releases giving some gloss to what was otherwise another lacklustre week for equities. The Retails Sales, manufacturing data and consumer sentiment data on Friday all beat expectations. Of greater importance to the market was medium-term inflation expectations which fell to 2.8% – the lowest reading this year.
The Federal Reserve can only react to actual data of course – not what consumers are thinking. Last week’s inflation data reminded the market how far price rises have risen – June’s rise to an annual rate of 9.1% was the biggest increase since November 1981. The markets’ reaction was initially what you might expect but by the end of the week US equities were clinging on to the hope that inflation might start to moderate.
There is substance to this view as commodity markets continue to fall with a strong dollar and a global slow-down putting pressure on base metals and other soft commodities. Copper, an industrial bellwether, fell a further 7.75% last week – since mid-April Copper has now fallen 33% with little sign of any respite. News from China and the persistence of the covid outbreaks put further pressure on the metal as demand does not look likely to return any time soon.
The Hang Seng index was another casualty of the new rolling lockdowns in a number of Chinese provinces.
EURUSD -1.00 –0.98% GBPUSD -1.61 -1.33% USDJPY +2.44 +1.8%.
The US Dollar gained ground last week with the annual inflation reading of 9.1% adding more fuel to the fire. Immediately after the data, expectations jumped to 76% probability of a full 1% hike by the Fed at the end of July meeting. By the end of the week this probability had subsided to just 50%. We will find out on the 27th.
Gold -32 -1.83% UK OIL -6.1 -5.7% US OIL -7.2 -6.8% Bitcoin -639 -2.9%
Gold continues to be dragged lower by the strong US Dollar. Any link to inflation has long ago been lost. Oil markets continue to slide with other commodities as concerns of a global slowdown dents confidence. A modest drop in demand is enough to take the froth off this market. News of further covid outbreaks in China and more rolling lockdowns will not help this mood. Thirty-one Chinese cities are in full or partial lockdown, which is affecting 247.million people which is 17.6% of the population.
Data / events for the week ahead
Not a particularly busy business week for data and events. In the UK,
the campaign for the leadership of the Tory party, and Prime minister,
continues.
Monday
UK - Saunders from MPC speaking at Resolution Foundation
Tuesday
UK - Andrew Bailey from Bank of England speaking at Mansion house Dinner
Wednesday
UK - CPI – Inflation data. Another rise to 9.3%. Sterling and UK equity and bond markets sensitive. Risk is for a bigger increase.
Thursday
Japan - Bank of Japan policy meeting. The BoJ have been sticking to their ultra-loose monetary policy and defence of the zero yield on the 10yr JGB. What will be worrying the Bank is the weakness of the Yen which plunged another 1.85 versus the US dollar. Officials have started to make noises about the weakness of the Yen and the inflationary pressures that will build up as a result. Could the BoJ finally give in?? Possible but not likely yet.
Eurozone - ECB Policy meeting. The governing council have signalled a rise of 0.25% to minus 0.25% but recent rate rises by other central banks suggest that the ECB could raise rates by 0.5%. Euro and Eurozone assets all sensitive. Press conference could be interesting if there is a surprise.
US - Philly Fed Manufacturing Index. Slight recovery.
Friday
Eurozone, UK
& US - Services and Manufacturing PMI data. A mixed bag with manufacturing and services coming under pressure in the developed world.
