Fed Chair reaffirms commitment to aggressive Fed hikes

The much-anticipated ECB forum in Sintra, Portugal, saw the Fed Chair Jerome Powell, suggest that the Fed are likely to remain committed to tacking inflation, and keep to their current programme of aggressive rate hikes, so long as the economy continues to remain in good shape. Whilst Powell understands that there is a risk that those hikes could ultimately send the U.S economy into a recession, he (and the Fed) still perceives the bigger risk to be persistent inflation. He said that ‘there is a clock running here, where we have inflation running now for more than a year’. 

Markets wobble (a bit), and the dollar rallied (a bit more)

Whilst the Fed chair said nothing really ‘new’, his resolute commitment to tackle inflation by front-loading Fed rate hikes was enough to give the dollar a bit of a lift on the day, and contain any upside momentum for broader asset prices. The dollar index moved up towards the key 105.00 region once again, and EUR/USD slipped back under 1.0450. GBP/USD followed the same path, slipping back under 1.2150 for the first time in two weeks. USD/JPY broke over 136.50 – a new cycle top and USD/CAD remained under 1.2900, as those frothy oil prices kept the Loonie buoyant.

A cautious Bailey?

Powell may have remained hawkish on rates, but the BoE’s Bailey suggested that it was very hard to separate the impact of Brexit from COVID, which may imply that the BoE remain more cautious with their own programme of rate hikes, perhaps also helping to dampen the spirit of the sterling bulls on the day. However, he did (just about) keep the door open to a 50bps rate hike. The ECB’s Lagarde highlighted at the same forum, that we are unlikely to go back to an environment of low inflation, which I think we could all agree with. Whilst the previous preferred central bank ‘goal’ of 2% inflation seems an unachievable level in the current climate, we are all still left pondering what then might be an acceptable level of inflation for the major central banks going forward.

Weaker U.S growth

The revised (final) U.S GDP (Q1) growth figures were released yesterday, highlighting a softening from -1.5% to -1.6%, and slightly missing consensus estimates. The drop reflected a sharp decline from the stellar 6.9% growth in Q4 ’21, with the data being impacted as corporate profits declined more than had been previously estimated. Today sees the release of the latest Core Personal Consumption Expenditures (Price Index), which is the inflation print that may finally start to show a decline, with a reduction from 4.9% to 4.7% (YoY). We live in hope.

Spanish inflation tops 10%, German inflation declines

On the other hand, the latest inflation report in Spain (out yesterday) has seen inflation top the rather unwelcome and particularly dizzy 10% region – registering the highest inflation in Spain since 1985. Talking of old records, 1985 also happens to be the first year that compact discs (CDs) were introduced worldwide. Elsewhere, German inflation actually slipped from 8.7% to 8.2% (YoY/Jun) yesterday, which is finally a bit of good news on the inflation front, given that expectations were for an increase to 8.8%, and will have no doubt given the ECB something to smile about. Yay. 

UK GDP

UK growth figures have just been released, with the GDP report (QoQ/Q1) out a little earlier this morning. At 0.8%, Final GDP (Q1/22) was bang in-line with expectations. That puts the annual reading at 8.7% (Q1/YoY).

What else is happening today?

EUR – German, Euro area Unemployment, French CPI, Spanish Current Account Balance

USD – Core PCE, Personal Income & Spending, Initial Jobless Claims, Chicago PMI

CAD - GDP

NZD – Building Permits

GEN – OPEC Meeting

Bold denotes key data