The stock futures in the US and Europe are trading lower as traders continue to digest the message from the central bankers who spoke in Sintra yesterday. The higher cost of living is the main focus for FTSE 100 traders, which continues its downward trend. As for the geopolitics, the Russian Rubble continues to gain strength despite sanctions from the US and its allies.
The cost-of-living issues have started to trickle down to businesses, causing business confidence in the UK to plummet to its lowest point since the coronavirus lockdown of 2021. In June, the confidence index for Lloyds Banking Group Plc dropped 10 points to 28%, a 15-month low, the firm reported today. Businesses have shown to be more robust than consumers to the sharpest inflation rate in four decades, with corporate confidence maintaining steady even this year while consumer pessimism hit a record.
The strongest indication that Russia is enduring sanctions better than anticipated is the currency’s rising value. Inflation is being controlled, and the central bank is now free to promote demand. Vladimir Putin is now more confident and is squeezing European energy supplies. However, the economy’s adaptability is limited. Production is declining, and the recession is predicted to worsen in the second half as trade restrictions reduce earnings and complicate supply networks.
Since Putin began his invasion of Ukraine, the Ruble has increased by over 60%. This increase may be attributed to rising energy costs, capital controls, and import restrictions. Putin may use gas flows to Europe for political purposes now that the Ruble is uncomfortably strong without running the risk of a new financial disaster. The economy has become more stable because of the appreciation of the currency. We anticipate the central bank to deliver another 125 basis points of interest-rate reduction this year, having already undone all emergency tightening. We forecast inflation easing further to around 14 per cent at year’s end.
There is simply a little respite. Per consensus, we are continuing to predict that the GDP will decline by about 10% this year. High levels of uncertainty make it more likely than anticipated that the contraction would be more profound. However, the chances of recovery are slim.
ECB, Fed and BOE
At the ECB conference in Sintra yesterday, some of the most significant central bankers in the world took the stage.
ECB President Christine Lagarde had the chance to object to market expectations for the euro area’s policy rates, but instead, she essentially supported them. According to Lagarde, the financial markets are aware of and supportive of what the ECB is doing.
By the end of the next year, traders had already factored in a rate hike of 2%. That is lower than the rates in the UK and the US, but it is still higher than the 1.5 per cent rate that we estimate to be the neutral rate for the monetary union, which is also the level we believe the ECB will cease raising. This is significant for Italy since greater expectations for the ECB’s policy rates have increased perceptions of credit risk, accounting for the majority of the rise in Italy’s debt costs this year. That is not encouraging for the nation’s financial stability.
Jerome Powell: Despite saying that fighting inflation was very likely to require some pain. The Fed Chairman Jerome Powell did not indicate that the Fed would move quickly in response to downside threats to GDP. Powell may be swaying away from opinions that weak jobs report on July 8 would be sufficient to downshift rates to 50 bps next month, subject to fresh evidence on inflation, by referring to a “tremendously strong” labour market and significant surplus savings at this time.
Powell also noted that despite the Fed only moving three times this year, markets have primarily adopted the interest rate hike trajectory seen in the dot plot, where rates went into restrictive territory. That is correct, but we anticipate that persistently strong inflation will drive the Fed to act even more forcefully and raise the fund’s rate to 4% by 2Q23.
According to Andrew Bailey, pay settlements have come under the spotlight due to disputes between unions and the government. Andrew Bailey, the governor of the BOE, walked a delicate line by emphasizing that there is no magic figure for the ideal quantity of compensation increases. One conclusion from his words is that the BOE is utterly focused on how wage trends are shaped by inflation expectations, with rate rises tailored to fit.