May 25, 2023

Daily Report 25/05/2023

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Sterling posted further gains after the much higher than expected inflation print for May, especially with an increase in the core rate to 6.8% from 6.2%. There was a fresh shift in Bank of England interest rate expectations with markets considering that there was a 100% chance of a rate hike at the June meeting and there were also expectations that there would be further hikes, potentially to 5.25%. There was also a raft of upward revisions to interest rate forecasts by investment banks. Sterling was unable to hold the gains amid fears that a more restrictive monetary policy would cause further damage to the economy. Risk appetite also dipped which sapped potential support for the UK currency in global markets. The CBI industrial orders index improved slightly to –17 for May from –20 the previous month. Bank of England Governor Bailey stated that inflation expectations were falling and that companies were sending signals that they intend to slow price increases, but there were risks that inflation would fall only slowly from now on. He added that the key question is how sticky and stubborn inflation proves.

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The German IFO business confidence index dipped to 91.7 for May from a revised 93.4 the previous month and below consensus forecasts of 93.0. There was a small decline in the current-conditions component and a steeper retreat for the expectations component. According to the IFO, the economy is heading towards stagflation in the second quarter of the year. It added that the economy is treading water and the strong collapse in industrial expectations is striking. It added that interest rate hikes appear to have dampened demand.

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Fed Governor Waller stated that the decision whether or not to raise rates in June will depend on the data releases over the next three weeks. He added that prudent risk management may suggest skipping a June move and lean towards a July hike depending on inflation data and whether credit conditions have tightened excessively. He added that he does not expect that the data in the next couple of months to make it clear that the terminal interest rate has been reached. He also noted that he did not backing stopping rate hikes unless there is clear evidence that inflation is moving down to the 2% target. According to minutes from May’s policy meeting, several members stated that further policy firming may not be needed if the economy evolves in line with their expectations. Some participants, however, considered that additional firming would likely be warranted.

Key Data 

13.30 Gross Domestic Product Annualised (Q1) Exp. 1.1% Prev. 1.1%