European markets underwent another day of stabilisation yesterday after the turmoil of last week, however the gains were still modest when compared to the slide seen last week.
US markets also returned from their extended weekend break, with an equally positive session, with the Nasdaq 100 helping to lead the way higher.
While stock markets have stabilised over the last couple of days yields have continued to look sticky with bigger rises on the longer end of the curve.
Despite yesterday’s gains, today's European open looks set to be a negative one, as a slide in oil prices over demand concerns weighs on the wider narrative, prompting weakness in Asia markets, along with US futures.
Today’s main focus will be on the latest UK inflation numbers for May, as well as Fed chair Jay Powell’s testimony to US lawmakers this afternoon.
Last week the Bank of England caused a few eyebrows to go up when they only raised the base rate by 25bps, while at the same time saying that they would act “forcefully” on inflation if necessary.
They then followed that up by saying they expect inflation to peak at an eye watering 11% by year end, an upgrade from its previous 10% estimate, begging the question as to what level of inflation would justify a bigger hike?
With headline inflation already at 9% this messaging merely served to showcase what a muddle the Bank of England finds itself in, and was reinforced yesterday by chief economist Huw Pill when he said that the central bank would allow growth to weaken in order to help the bank hit its 2% inflation target.
While this comes across as hawkish, it certainly doesn’t chime with the actions of last week, even if it does tie in with the wider guidance narrative.
Ordinarily the two should work hand in glove with each other, however the reality is somewhat different, with the bank saying one thing, and doing something completely different.
Most of the rise in April CPI was due to a sharp rise in gas and electricity prices, along with petrol prices, which accounted for 4.2% of the increase.
This is likely to be an ongoing theme for several months given that thus far we’ve seen little evidence of a slowdown in forecourt pump prices, as well as even higher PPI and factory gate prices. May input prices are expected to rise from an already record high of 18.6% in April to 19.4%, in data due to be released later this morning, and given that they tend to be leading indicators for CPI, headline inflation is likely to keep on rising over the summer months.
The weakness in the pound isn’t helping in this regard, a point made by external MPC member Catherine Mann earlier this week, largely due to the strength of the US dollar, which has pushed the pound down over 12% over the last 12 months
This is largely down to the increased aggressiveness of the US central bank which appears determined to export its own inflation problem to the rest of the world by hiking rates sharply in the coming months. Mann appears to be more alive to the risks that this might pose to the UK economy than her peers, by suggesting more rapid rate hikes now with a view to a policy reversal when inflation starts to fall back rapidly.
No one is suggesting that the Bank of England matches the Fed hike for hike, but they should at least give the impression in being serious about tackling the problems posed by a weaker pound, as well as trying to keep the interest rate differential as narrow as possible, if only to mitigate the inflationary impulse currently affecting the staples of energy first and foremost, as well as food, all of which are priced in US dollars.
If the Bank of England is looking for reasons why people have so little confidence in them, the events of the last few days are as good as any when it comes to the reasons why, with headline inflation set to rise further today, with expectations of an increase to 9.1%, although there is some optimism that core CPI may well start to slow from 6.2% to 6%.
During the afternoon session Fed chairman Jay Powell will be on Capitol Hill giving testimony to US lawmakers on the state of the economy, where he is likely to face questions on how far the central bank is prepared to go to tame inflation, in terms of how high does he expect rates to go, and whether he agrees with his colleague Christopher Waller that the only priority for the Fed now is to tackle inflation, and whether the Fed is prepared to allow unemployment rise sharply to achieve that goal.
EUR/USD – still struggling to move above the 1.0600 area. We need to see a move above 1.0600, as well as trend line resistance from the highs this year, which comes in at 1.0680, to open up the 1.0800 area. Below 1.0330 targets parity.
GBP/USD – bias remains for a move higher after the failure last week to push below the 1.1950 area. We need to push above the 1.2450 area for this to unfold. Below 1.1950 targets the 1.1500 area.
EUR/GBP – currently holding above trend line support from the recent lows in April at 0.8520. The current rebound needs to push above 0.8630 area. A break below 0.8500 targets the 0.8420 area and 200-day MA.
USD/JPY – has pushed through the previous peaks at 135.60, putting the US dollar on course for a move towards 137.00 and ergo on towards 140.00. Support now comes in at 135.40.