June 13, 2022

Daily Report 13/06/2022

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The latest Bank of England data recorded an increase in 1-year inflation expectations to 4.6% from 4.3% which will maintain concerns within the central bank that inflation expectations will become de-anchored. This will maintain pressure for the central bank to tighten policy further to rein in inflation. Sterling was unable to make any headway after the data and posted sharp losses after the US inflation data. The UK currency declined very sharply to lows against the dollar as strong US gains and a slide in risk appetite caused major damage. CFTC data recorded a further decline in short non-commercial Sterling positions to just below 71,000 in the latest week from over 74,000 previously. There will still be scope for further short covering, but only if there is a shift in Sterling sentiment. Vulnerable risk conditions undermined Sterling on Monday. Latest UK GDP data recorded a 0.3% decline for April compared with expectations of a slight increase with industrial production dipping on the month.

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There were strong gains for left-wing candidates in the first round of French parliamentary elections with President Macron’s party potentially losing its majority in the second round. On the data front, there are figures released for the Eurozone over the coming days, although the focus still very much remains on the European Central Bank’s announcement last Thursday about future rate hikes.

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US consumer prices increased 1.0% for May compared with a forecast of a 0.7% increase with the year-on-year rate increasing to 8.6%. This was significantly above consensus forecasts that the rate would remain at 8.3% and also the highest rate since early 1982. Food prices increased 1.2% on the month with an annual increase of 10.1% while energy prices jumped 3.9% for May with an annual increase of 34.6%. Within the energy sector, fuel oil prices increased over 100% on the year. The core annual rate declined to 6.0% from 6.2%, although this was also slightly above market expectations of 5.9%. There was resumption in price increases for used vehicles with price increases across all major sectors which increased fears that inflation would be very slow to subside. Following the inflation data, there was a fresh shift in Federal Reserve pricing with markets pricing in 150 basis-points in tightening for the next three Fed meetings and there was also speculation that there would be a more aggressive 75 basis-point increase to 1.75% at this week’s meeting. Markets also priced in a Fed Funds rate of close to 3.00% at the end of 2022. The 2-year bond yield increased to 3.0% for the first time since 2008 which had an important market impact.

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