The resilience of equity markets has been something to behold in recent days, despite the rise in bond yields that we’ve seen over the past two weeks, with the FTSE 100 and DAX both closing at a three-week high.
The Nasdaq 100 led yesterday’s gains for US markets, pushing up to one-month highs, and above the levels seen prior to the Russian invasion of Ukraine.
The relative insouciance of equity markets to rising yields could well be the perception that the Fed still has plenty of room to get the Fed funds rate back to its pre-pandemic levels of 1.5% to 1.75%. This may help explain why a 50bps hike in May is, along with another rise of similar magnitude, being received calmly.
As we look ahead to today’s European open, and another positive start, as Asia markets pick up Wall Street’s baton, today’s main focus is on the latest inflation numbers from the UK and the spring statement from the chancellor of the exchequer at 12.30pm (UK time).
Having seen the Bank of England raise rates by 0.25% last week, today’s inflation numbers for February are unlikely to assuage concerns that we won’t see further sharp rises in the cost of living in the coming months. With wage growth still trending well behind price rises, we are unlikely to see the gap narrow in the coming months, despite recent above headline inflation pay rises announced by a number of major retailers in the last few months.
In January UK CPI rose to a new 30-year high of 5.5%, while RPI rose to 7.8%, and is set to surpass that today by rising to 6%, while RPI is set to rise to 8.2%. The increase in core prices to 4.4% also showed that underlying inflation is still on the rise and is likely to rise to 5% today. Slightly more worrying, for those looking for signs of a top in price pressures, there is little evidence of a slowdown in the more forward-looking PPI numbers. These are also expected to increase further, with output prices expected to rise from 9.9% to 10.1%, while input prices are expected to rise to 13.9%, from 13.6%.
This is likely to be more of a concern for the Bank of England, who while offering a dovish narrative last week, may well have to tighten a lot more, if the Federal Reserve starts to tighten aggressively, in order to keep a floor under the pound. We’ve already had the Bank of England admit that headline inflation could well rise to 8% and possibly higher in Q2, which rather jars with its rather dovish tone last week.
It is against this backdrop that chancellor Rishi Sunak will get up and deliver his spring statement later today, after PMQs. The chancellor has quite understandably come under fire for insisting that the rise in national insurance must go ahead, despite the economic situation being fundamentally different to what it was when the measures were first announced.The rise, which will affect both business and consumers, is remarkably ill-conceived at a time when the inflationary impulse of the Russian war on Ukraine has only just started to make itself felt, with the worst yet to come.
There is a saying in financial markets that when the facts change, I change my mind, and surely it should be no different when managing the public finances. Pursuing a bad investment strategy in financial markets and then doubling down it would usually result in an even worst outcome, and yet what we have here appears to be the political equivalent. That said Rishi Sunak will need to come up with something, and there are some steps he could take to mitigate the effect on some of the most economically susceptible to the current rises in food and energy prices.
Yesterday’s public sector borrowing numbers showed that the chancellor has about £25bn more to play with than originally expected back in October. On the national insurance front, he could raise the primary threshold from £9,880, and push it closer to the level of the personal allowance. He could also cut fuel duty which is currently set at 57.95p per litre, or he could cut the VAT rate on petrol and diesel from the current 20% to 12.5%. Of course, he could do a combination of the two.
For the hospitality industry, he might see fit to extend the VAT reduction beyond April, as well as look at other measures to help businesses who have had a nightmare couple of years due to the pandemic. This could inclued an extension to the super deduction, which is due to end at the end of 2023, with some calls that it ought to be made more inclusive so small businesses can use it.
EUR/USD – fell back to the 1.0960 area yesterday, before rebounding. We need to push up through the 1.1120 area to signal a move towards the 1.1250 area. Key support remains at trend line support from the 2017 lows, at 1.0810. Below 1.0780 opens the risk of a move towards 1.0600.
GBP/USD – has finally sustained a move above the 1.3220 area but needs to hold above 1.3200 to signal a move up towards the 1.3420 level. We still have support at the 1.3000 area and need to hold above that to minimise the risk of a move towards 1.2800, on a break below 1.2980.
EUR/GBP – continues to come under pressure with the next support at the 0.8280 area. A move below 0.8280 signals a retest of the lows at 0.8200. Resistance comes in at the 0.8420 area.
USD/JPY – moved up through the 120.00 area and looks set for a move towards 121.70. Support now comes in at 118.70, however move is becoming a little overextended.