Week ending 10th June 2022.

After a positive start to the week, global equity markets fell as the weekend approached after the ECB outlined plans for higher Eurozone interest rates and US CPI inflation data for May disappointed.

As expected, ECB policymakers yesterday (Thursday 9 June 2022) left interest rates unchanged.  However, of more importance to us were the clues on what is in store in terms of size and timing of future interest rates, which came in remarks from the ECB President, Christine Lagarde at the accompany press conference and ECB statement.

The ECB explicitly stated that it would increase Eurozone interest rates by 0.25% at its next meeting on 21 July 2022, and given their new projections for 2022 inflation rose to 6.8% (and is not expected to be back near their 2% target until the 2024), policymakers indicated that they would continue to increase interest rates at a “gradual and sustained path” at subsequent meetings.

Interestingly, although the ECB statement appears on the surface to be very hawkish, July’s increase is actually less than the financial markets had pencilled in – suggesting to us that policymakers don’t share the market’s sense of urgency with significantly higher interest rates and obviously share our view that inflation will fall on its own volition.

On the subject of inflation, this afternoon’s headline US CPI inflation data reading of 8.6% weighed heavily on equity market sentiment.

Unsurprisingly, the bulk of the increase in the headline reading from 8.3% in April to 8.6% in May came food and energy: energy prices rose 3.9% during the month and is now up 34.6% over the past year; US petrol prices are 48.7% higher than a year ago; and food prices 10.1% higher.

Other contributors included airline fares (which rose 12.6% during the month and are now 37.8% higher than a year ago –reflecting both higher fuel prices and the distortions caused by lower airfares during the coronavirus lockdowns); and used vehicles (+1.8% on the month and +16.1% on the year – reflecting the on-going supply-chain issues impacting new car production).

However, while the headline reading came in higher, the core reading (which excludes volatile items such as food and energy) actually eased from 6.2% in April to 6.0% in May – and Fed policymakers have made no secret of the fact that they focus on the core readings for inflation.

Thankfully, we don’t have to wait long to see what the Fed policymakers think about today’s inflation data as their next meeting is on Wednesday (15 June 2022).

We also have monetary policy meetings at the BoE (Thursday 16 June 2022) and BoJ (Friday 17 June 2022).

Additionally this coming week we have UK GDP for April; US, UK, Eurozone & Chinese industrial production; UK employment data; US housing data & mortgage applications; US, UK & Chinese retail sales; and the Empire State Manufacturing survey.

Investment Management Team