US and European stock futures are trading lower once again as traders take some profit off the table. The UK’s and EU’s CPI numbers remain in focus, and they are likely to drive the price action. As for the US, traders are paying attention to two things: rising geopolitical tensions between the US and Russia and Powell’s commitment to lower inflation.
Inflation in the UK is expected to rise to 9% in April, up from 7% in March. The Bank of England predicted a reading of 9.1 per cent in its May prediction. In February, the UK’s energy regulator, Ofgem, announced a 54% increase in the home energy price cap, which went into effect in April. This will add about 1.7 percentage points to the headline inflation rate. We expect the annual CPI to rise further due to core goods inflation. We don’t anticipate inflation to go below 8% this year since rising goods and energy prices keep prices high. We still foresee a significant reduction in 2023.
While the Bank of England has upped its benchmark rate to 1%, with retail-price inflation at 9%, market pricing appears to be suspicious of the assumption that inflation can essentially cure itself if left to its own devices. The central bank’s recent inflation estimates against reality have proven unreliable, and companies, according to Governor Andrew Bailey, are significantly more enthusiastic about employing people than the central bank and don’t share the central bank’s worry about the economic climate. Indeed, if further confirmation is required, yesterday’s employment data confirms the tightness of the labour market.
Despite lower energy prices, core inflation in the eurozone increased to 7.5 per cent in April from 7.4 per cent in March, as core pressures increased. More information on the drivers of these pressures will be released today at 09:00 AM GMT with the final estimate.
In April, energy inflation slowed. We believe that tax reduction in on-road fuel expenses was the primary driver. Housing energy expenses may be reaching their pinnacle as governments increase attempts to prevent the pass-through of rising natural gas prices to families.
On the other hand, lower energy contributions were more than compensated by broad-based pressures from other spending areas. Food inflation increased to 6.4 per cent, while core inflation rose to 3.5 per cent, up from 2.9 per cent in March.
As inflationary pressures become more widespread and indices of underlying pricing pressures rise, the ECB is getting increasingly concerned.
Fed Chair Jerome Powell reaffirmed his commitment to bringing inflation down, stating on Tuesday that he will support interest rate hikes until prices return to a reasonable level.
The Fed hiked benchmark borrowing rates by half a per cent earlier this month, the second hike in 2022, as inflation hovers near a 40-year high.
Following the rise, Powell stated that further 50 basis point increases would be anticipated at subsequent sessions if economic conditions remained stable.
He reiterated his commitment yesterday to bring inflation closer to the Fed’s 2% objective. Still, He warned that it would be difficult and may come at the price of a 3.6 per cent unemployment rate, which is just above the lowest since the late 1960s.P
Powell said if unemployment went up a few ticks, you’d still have a solid job market. He also added that there are a variety of realistic pathways to a gentle or soft-ish landing. It’s not Fed’s duty to predict the outcome; their responsibility is to strive to tame inflation.
A Looming Default
After a deadline expires next week, the Biden administration is expected to prohibit Russia’s ability to pay US bonds entirely. When a temporary exemption expires on May 25, the Office of Foreign Assets Control is anticipated to let it lapse. The waiver, which was granted immediately after the United States imposed sanctions on Russia for its invasion of Ukraine in February, has allowed Moscow to pay coupons and avoid defaulting on its government debt.
The first three months saw Japan’s economy contract as a rising import bill. The impact of omicron sent the country’s economic recovery into reverse, providing some support for the Bank of Japan’s stance that stimulus should be maintained for the time being. In the quarter ending in March, GDP shrank by 1% annually.