Daily Brief

Inflation, inflation, inflation

German inflation hits a 50-year high

The latest headline inflation readings in Germany and Spain both exceeded estimates, after being released yesterday. German inflation has now risen from 7.8% to 8.1% (YoY/May), edging above the 8% print expected, and representing another unwelcome jump in prices for Europe’s largest economy. The monthly increase is even more eye-watering, up a further 1.1% after last month’s 0.7% gains. Unsurprisingly, Inflation is now at its highest level in Germany since reunification.

Bratwurst and Beer

The high inflation is being driven by soaring food and energy price increases for the most part. As you might expect, German bonds slipped on the news, with the yield on the 10-year benchmark moving as high as 1.05%*. In Spain, the 8.7% (YoY/May) inflation reading was perhaps even more worrisome, after the brief dip in April and that cumulative data will help to heap further pressure on the ECB, who are meeting in just 10 days from now. No doubt, the 50bps hike brigade amongst the ECB will feel that their case is even further justified by that inflation news.

*Bond prices and yields move in opposite directions.

113 basis points worth of hikes by year-end

All of this has ensured that market-implied pricing has now risen to estimate roughly 113 basis points worth of rate hikes from the ECB before the end of this year, a figure that could be driven even higher once today’s Euro-area cumulative HICP inflation data is released later this morning. The latest estimates predict a jump to around 7.7% (YoY/May) from 7.4% previously. Take food and energy out of the mix, and that figure drops to a far more digestible 3.5% (YoY), which is a stark reflection of just how much an impact the war in Ukraine is having on the region.

A higher single currency

EUR/USD understandably broke higher on the news, rising back above 1.0780 for the 1st time since the end of April. GBP/EUR slipped back under 1.1740. Whilst the direction of travel remains consistent with last week’s dollar decline, the moves were perhaps somewhat constrained on the day by the U.S Memorial Day holiday, and we have witnessed some consolidation overnight. We should also expect more volatility around the single currency on the back of the region-wide inflation update later this morning.

A surging Loonie

USD/CAD dropped to a one-month low under 1.2650 yesterday, marking the Loonie as one of the best performing G10 currencies on the day. The price of oil keeps probing stubbornly higher, with both Brent and US Crude now back above $115pbl, helping to underpin the Loonie. Furthermore, improved market sentiment and that broadly weaker greenback are further fuelling the decline in USD/CAD. The latest Canadian GDP (QoQ/Q1) data is out later today, and markets expect a softening toward 5.4%, from the 6.7% print previously. However, that figure is unlikely to sway thinking at the BoC, who are fully priced to hike Canadian rates by a further 50bps at the conclusion of their latest MPC meeting tomorrow.

The dollar, indexed

The dollar index (DXY) has now declined from 105.0 to 101.10 since the 13th May. Of course, much of that move can be attributed to the rally higher in EUR/USD, given that the single currency comprises roughly 57.6% weighting of the DXY. However, the dollar is facing headwinds across the board, with GBP/USD recently edging back toward 1.2700, and the likes of USD/CHF threatening to move under 0.9500. Further afield, emerging market (EM) currencies have been basking in that more risk-friendly backdrop too, marking much broader gains against the dollar in the process.

What else is happening today?

In Europe, German Unemployment & Swiss GDP. For the UK, Consumer Credit & Money Supply. In the U.S, the latest Housing Price Index, Chicago PMI & Consumer Confidence. Consumer Confidence is our pick of that particular bunch. Overnight, the latest Australian GDP (QoQ/Q1) figures are released, as well as S&P Global Manufacturing PMI. The GDP print is of particular interest to markets.


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