Daily Brief

A look back at the FOMC minutes

A soft U.S PMI, and more of that weak housing data

The recent trend of weaker U.S economic data continued yesterday, after a weak looking PMI, coupled with a softer New Home Sales print, left markets worrying about the increasing chances of stagflation for the world’s largest economy. The composite PMI slipped to 53.8, versus a 55.5 estimate and 56 previously. Even more worrying was that New Home Sales slumped by 16.6% during April, after dropping 10.5% in March. As we have observed previously, there has been a distinct decrease in activity across all sectors of the US housing market, reflecting that sharp rise in U.S mortgage rates.

A more ‘normal’ market reaction

The impact to markets could perhaps be best described as a more traditional risk-off reaction, with a rally in the bond market and a pop higher for Gold, coupled with a sell-off in the likes of the Nasdaq and riskier assets. For currencies, the dollar continues to consolidate those recent gains, with both the CHF and JPY forging sharp rallies against the buck. USD/JPY slipped under 107.00 for the first time in a month, and USD/CHF moved back under 0.9600, which in both cases were a more traditional reaction. The dollar index also moved back under 102.00 for the first time in a month.

More talk of 50bps hikes within the ECB

EUR/USD pushed back up through 1.0700 for a spell yesterday, despite softer than expected Euro-area PMI readings. As well as being driven by that weaker dollar, the talk of a 50bps rate hike by the ECB at their July meeting just won’t go away, and is helping to drive gains in the single currency. This time it was the turn of Austria’s Holzmann to push for a big hike come July. ECB Head Christine Lagarde was left having to fend off questions (at Davos) that the ECB might just be behind the curve, which is one reason that we are seeing such a push for a big hike within the ECB. This all becomes especially significant when you consider that we are already seeing weaker data in both the U.S and UK, questioning the sustainability of future rate hikes, despite both central banks having an ongoing fight against surging inflation.

A bit more cash in the pocket

There was an unexpected drop in UK public sector borrowing last month, coupled with a lower than previously estimated total for the latest fiscal year. The news will potentially give chancellor Rishi Sunak greater firepower to impact the cost-of-living crisis. He certainly needs it as the government are under intense pressure to help the beleaguered UK consumer. Public sector net borrowing came in at £18.6bn (Apr), way down from the £24.2bn figure this time last year. The office for Budget Responsibility (OBR) had projected a £19.1bn figure for this month.

Overall government borrowing has fallen on a yearly basis, due primarily to the fact that tax revenues have risen as the UK economy has expanded. Furthermore, government spending on pandemic-related schemes understandably fell as the programmes were wound down, which has also been a big boost to the bottom line. The good news is that the government are expected to announce a relief package totalling around £10bn to help the consumer, over the next day or so.

An ugly PMI

Despite that good news, the latest UK Services PMI (May/Prel) slipped to a particularly worrying 51.8 (from 58.9) yesterday. Markets had only been expecting a decline to around 57.3 or so. Anything under 50.0 is key, as it is considered economically contracting. The news helped to take some of the shine off the recent sharp rally in GBP/USD, which fell back under 1.2500 for a spell, having reached 1.2600 beforehand. Only that weaker greenback saved the pound’s blushes on the day. GBP/EUR moved back under 1.1700 for the first time since early May, with the decline accelerated by the stronger single currency.  

50bps again from the RBNZ

The RBNZ raised interest rates by 50bps in New Zealand for the second meeting in a row overnight, as they attempt to reign in surging inflation in the country. In a press conference after the announcement, RBNZ governor Adrian Orr said that he is confident that households can withstand higher interest rates in New Zealand. The news helped to lift NZD/USD back over 0.6500.

What else is happening today?

The May FOMC minutes are released, which will be closely scrutinised by markets. Also in the U.S, the latest Durable goods orders are due. We will also need to constantly monitor speeches and comments from various officials at Davos.


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