May 24, 2022

Daily Report 24/05/2022

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Sterling continued to post gains after the European open on Monday with further support against the dollar. Risk-sensitive currencies were also able to secure a further recovery as equity markets posted gains and this was an important element underpinning short-term Pound support. Sterling peaked against the dollar with further evidence of short covering before fading slightly. Bank of England Governor Bailey stated that the UK has a very tight labour market, but that does not mean that the UK looks like a story about rapid demand growth and that the economy is facing a very big negative impact on real income. According to Bailey, the bank is ready for more interest rate hikes if needed. There were still reservations whether the UK would be able to tighten policy significantly further and rate hikes from here are liable to lag behind the US and Euro-zone.

Key Data

9.30 S&P Global/CIPS Services PMI (May) Exp. 57.3 Prev. 58.9

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The German IFO index strengthened to a 3-month high of 93.0 for May from a revised 91.9 the previous month and comfortably above consensus forecasts of 91.4. The IFO stated the economy is showing resilience and that there is no sign of recession. The services-sector was more confident, although the industrial situation was more difficult. Inflation expectations eased slightly but, according to the IFO, this was more due to subdued demand rather than easing of supply-side stresses. In comments on Monday, ECB President Lagarde stated that the bank was likely to be in a position to exit negative interest rates by the end of the third quarter. She also warned that the pace and scale of monetary policy adjustment could not be determined in advance and the situation is complicated by the presence of negative supply shocks. The overall rhetoric was, however, more hawkish given the hints of two rate increases during the third quarter and the Euro secured further buying support. There were, however, also reports that some members wanted a faster speed of rate hikes. Bundesbank head Nagel focussed on the labour market and stated that it seemed to be clear that wage moderation seen for 10 years in Germany had now ended, reinforcing expectations of higher underlying inflation. ECB council member Villeroy said that a rate hike in the near term is probably a done deal and that the main problem is inflation while euro growth is resilient.

Key Data

8.30 German S&P Global/BME Composite PMI (May) Exp. 54 Prev. 54.3

8.30 German S&P Global/BME Manufacturing PMI (May) Exp. 54 Prev. 54.6

9.00 S&P Global Composite PMI (May) Exp. 55.3 Prev. 55.8

19.00 Christine Lagarde Speech

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The Chicago Fed national activity index strengthened slightly to 0.47 for April from a revised 0.36 in March. Treasuries edged higher in early New York but were unable to hold the gains and lost ground with the 10-year yield increasing to near 2.85%. Kansas City Fed President George stated that inflation is clearly decelerating but could jump again and reducing inflation is the top priority. She added that she expected interest rates to be around 2.0% by August. San Francisco’s Daly stated that the US economy had plenty of momentum and does not expect a recession.

Key Data

17.20 Jerome Powell Speech