Closing summary
European stock markets are rallying and Italian, Spanish and Greek bond yields fell sharply, as the European Central Bank announced it would skew reinvestments of maturing debt to help more indebted countries. It will also devise a new instrument to tackle “fragmentation” of the bond market.
Wall Street also opened higher, ahead of the eagerly-awaited rate decision from the US Federal Reserve at 7pm BST, followed by a press conference with Fed president Jerome Powell. America’s central bank is expected to raise rates from 1% by at least 0.50 percentage points, or even 0.75 percentage points (which would be the biggest rate hike since 1994), to tackle soaring inflation, although there are also fears that the economy could tip into recession.
Today’s other main stories:
Network Rail said there was “no real hope” of avoiding the biggest railway strike in 30 years next week, as it told passengers to plan ahead and only travel if necessary.
The full timetable will be published on Friday but operators including Southern, Northern, TransPennine and Transport for Wales have already told passengers not to attempt to travel on strike days.
The Japanese owner of the British chip designer Arm is reportedly planning to float some of the company’s shares in London, in a sign the government’s efforts to lobby for a UK listing of the Cambridge-based company may have succeeded.
SoftBank, which bought the chip company for $32bn in 2016, is said to be reconsidering earlier plans to only list shares on the US market.
The “bloodbath” in the cryptocurrency sector may claim another victim, with the co-founder of multibillion dollar hedge fund Three Arrows Capital using Twitter in an attempt to battle rumours that the company is insolvent following the market collapse.
Customers of the collapsed fast fashion retailer Missguided will not receive refunds for returns, administrators of the business have confirmed.
It comes after the Manchester-based company fell into insolvency last month after racking up millions of pounds in outstanding payments to creditors.
Bloomsbury has reported a record year for sales, as the Harry Potter publisher said the increase in reading during the pandemic had become “permanent” after lockdowns eased.
The company benefited substantially from Covid restrictions when homebound consumers turned to new hobbies, including reading, to pass the time.
Moments after he was announced as the government’s new “cost of living business tsar”, David Buttress, the multimillionaire co-founder and former chief executive of takeaway app company Just Eat, went out into his garden and inspected one of his chickens’ bottom.
“Long busy day with some great meetings,” Buttress tweeted on Monday night. “But always great to get home to the real world and ‘dad the chicken isn’t well can you go and check it’s [sic] bum’… keeping it real.”
Australia’s main wholesale electricity market has been suspended by regulators in the latest sign that the crisis threatening the stability of energy supplies is deepening.
The Australian Energy Market Operator (Aemo) took the drastic step of suspending the entire national electricity market for the first time in its history on Wednesday.
Temporary silos will be built along the Ukraine border, including in Poland, in an attempt to help export more grain from the country and avert a global food crisis, Joe Biden has announced.
The US president told a Philadelphia union convention on Tuesday that he was working with European governments on the plan “to help bring down food prices”.
Global fossil fuel company BP has bought 40.5% of a renewable energy hub in the Pilbara, billed as having potential to become one of the biggest suppliers of green hydrogen in the world.
The company will also operate the Asian Renewable Energy Hub, which has plans to generate up to 26GW of wind and solar energy – about a third of the electricity generated in Australia today.
My colleague in the US, Dominic Rushe, will cover the US rate decision tonight. Thank you for reading. We’ll be back tomorrow. Bye!
Here’s some reaction to the surprise 0.3% drop in US retail sales in May.
Andrew Hunter, senior US economist at Capital Economics, said:
The 0.3% m/m fall in retail sales in May and downward revisions to previous months’ gains suggest that surging prices might finally be taking their toll on real consumption. But with the latter still on course for solid growth of 3% annualised in the second quarter, that won’t stop the Fed from accelerating the pace of policy tightening later today.
Headline retail sales were dragged lower by a 3.5% m/m slump in auto sales last month, but that drop reflects the impact of China’s zero-covid lockdowns on Asian manufacturers rather than weakening demand. That decline was partly offset by the price-related 4% rise in nominal gasoline station sales.
Factoring in the surge in prices last month, the data suggest that overall real consumption edged slightly lower in May and, with prices likely to see another strong rise in June, a rebound in real spending looks unlikely.
That suggests second-quarter real consumption growth will be closer to 3% annualised, rather than the 4% we had previously pencilled in. But 3% real growth is still a respectable performance, and a long way from the collapse being predicted by the usual bearish suspects. The upshot is that there is little to stop the Fed taking more aggressive action to tackle rampant inflation over the next few months.
Wall Street has opened higher ahead of the Federal Reserve’s rate decision. The Fed is expected to hike rates from 1% by at least 0.50 percentage points, possibly even by 0.75 percentage points.
- Dow Jones up 206 points, or 0.7%, to 30,570
- S&P 500 up 28 points, or 0.8%, at 3,746
- Nasdaq up 140 points, or 1.3%, at 10,968
The European markets have rallied today, boosted by the European Central Bank’s surprise meeting to discuss ways of calming bond markets, and helping more indebted nations like Italy, Spain and Greece.
- UK’s FTSE 100 up 103 points, or 1.4%, at 7,291
- Germany’s Dax up 216 points, or 1.6%, at 13,520
- France’s CAC up 86 points, or 1.46%, at 6,036
- Italy’s FTSE MiB up 650 points, or nearly 3%, at 22,496
In the US, retail sales fell unexpectedly last month, dragged down by a decline in car purchases. Sales were down 0.3% in May from April, disappointing economists who had expected a small rise of 0.1% or 0.2%, and following a downwardly revised gain of 0.7% in April.
Disappointing economic data, with US consumers curbing their spending even on a nominal basis. May retail sales declined 0.3% vs the expectation for a 0.1% advance. Also, an unexpected contraction in Empire Manufacturing for June. The economy is cooling, at least on the margins
— Lisa Abramowicz (@lisaabramowicz1) June 15, 2022
ECB to devise new tool to help indebted eurozone members
The European Central Bank said after a rare unscheduled meeting that it will tilt reinvestments of maturing debt to help more indebted countries, and will devise a new instrument to tackle “fragmentation” of the bond market.
Government bond yields have soared across the 19-country currency bloc, especially in southern nations like Italy, Spain and Greece, raising government borrowing costs, since the ECB set out plans last Thursday to raise interest rates in July and September to tame soaring inflation.
Here is the full statement:
Today the Governing Council met to exchange views on the current market situation. Since the gradual process of policy normalisation was initiated in December 2021, the Governing Council has pledged to act against resurgent fragmentation risks. The pandemic has left lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions.
Based on this assessment, the Governing Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism, a precondition for the ECB to be able to deliver on its price stability mandate. In addition, the Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.
The pandemic emergency purchase programme (PEPP) was launched in March 2020 and ended recently.
Italian 10-year bond yields surged to 4.27% on Tuesday, the highest since early 2014, putting them 250 basis points above 10-year German government bonds, but fell back below 4% today ahead of the ECB meeting.
Updated
The Italian 10-year bond yield has fallen back even more, and is now down 31 basis points on the day at 3.91%, as the ECB is holding an impromptu meeting to discuss possible action to calm bond markets.
Lunchtime summary
Time for a lunchtime summary.
European stock markets are rallying as the European Central Bank’s governing council is holding an unscheduled two-hour meeting in Frankfurt to discuss the turmoil in bond markets. Government bonds sold off in recent days, driving yields higher, thereby making it more expensive for governments to borrow, especially in Italy and other southern, more indebted countries.
The Italian stock market led the rally, up 2.6%, while the UK and German indices rose more than 1% and the French market was up 0.9%.
There was relief in bond markets, with the yield on the Italian 10-year bond falling 26 basis points to 3.95%, down from eight-year highs. The question is what the ECB can do. Analysts think the ECB will use an existing tool, for example reinvesting maturing bonds, to stabilise bond markets, rather than announcing a new tool. Spanish and Portuguese bond yields fell by around 13 basis points while Greek yields declined by 25bps to 4.4% in their biggest daily fall since March 2020.
The euro rose 0.67% to $1.0482 against the dollar, while the pound also recovered after falling below $1.20 yesterday for the first time since March 2020. Sterling is trading 0.85% higher at $1.2095 at the moment.
Investors are also awaiting the US Federal Reserve interest rate decision, to be announced at 7pm BST. The Fed has signalled that it will raise rates again from their current level of 1%; the question is by how much -- 0.50 percentage points or 0.75 percentage points ? To tackle sky-high inflation.
Global oil demand is set to rise by 2% to a record high of 101.6m barrels per day in 2023, surpassing pre-pandemic levels, the Paris-based International Energy Agency forecast today -- although it also warned that high oil prices (Brent crude is currently at $120 a barrel) and a weaker economic outlook would weigh on oil demand in coming months.
Economic fears persist, as various international institutions have recently released downbeat outlooks. Similarly, tightening central bank policy, the impact of a soaring US dollar and rising interest rates on the purchasing power of emerging economies mean the risks to our outlook are concentrated on the downside.
Updated
Bert Colijn, senior eurozone economist at ING, said:
As we await the outcome of the European Central Bank’s unscheduled meeting to discuss ‘current market conditions’, we take in some of the latest data on the economy. The ECB has committed to hikes in July and September to stave off high inflation, but the eurozone economy itself remains weak at best at the moment. Industrial production data for April confirms this as the increase of 0.4% leaves production below the first quarter average.
The small increase was driven by most of the larger countries with Germany, Spain, Italy, and the Netherlands all seeing production grow faster than average. France saw a small decline of -0.1%. Across production categories, only capital goods production shrank a little while most of the others improved.
Overall, the environment for industry remains lacklustre. It is still dealing with large amounts of backlogs that guarantee production for the months ahead, but supply chain problems continue to cause delays for certain product groups. At the same time, demand is weakening as new orders are falling according to the most recent surveys on eurozone industry. Input price inflation, which is barely abating, adds to the squeeze that manufacturing businesses find themselves in for now.
In addition to industry data, trade data has also just been released. The trade in goods balance dropped much more than expected to -31.7 billion on a seasonally adjusted basis. The trade balance has deteriorated quickly thanks to high energy prices due to the war and this adds to euro weakness right now.
Returning to the European Central Bank’s surprise meeting (which was due to start at 11am local time in Frankfurt and last two hours) to discuss the recent sell-off in bond markets... Analysts at Daiwa said:
To give a flavour as to what to expect from the Governing Council today, yesterday evening the Executive Board’s key hawk Isabel Schnabel echoed recent comments by [president] Christine Lagarde that the ECB has “no limits” to tackle bond market fragmentation risks. She also insisted that the ECB “will not tolerate changes in financing conditions that go beyond fundamental factors”, and “monetary policy can and should respond to a disorderly repricing of risk premia that impairs the transmission of monetary policy”. But she added “How we ultimately react… will firmly depend on the situation we are facing”, suggesting no willingness to give any information about its reaction function in advance.
So, expect a similar message to Schnabel’s to be endorsed by the whole Governing Council today. That might provide a modicum of reassurance to markets. But no new policy tool will be unveiled. Indeed, the Governing Council will reportedly focus discussions on the mechanics of how PEPP [pandemic emergency purchase programme] reinvestments – a relatively modest instrument – can be deployed to support strained markets, while leaving the door open to the possibility that new tools can be developed flexibly in future if necessary.
So, the markets will be left in the dark as to whether, for example, any substantive conditionality would be attached to any new ECB support – additional to reinvestments – for strained sovereigns. And markets should also assume that any support forthcoming would be concentrated largely at the shorter end of the yield curve, which is most relevant for the monetary transmssion mechanism, rather than at the longer end. (Christine Lagarde is also currently scheduled to talk publicly this evening, but it remains to be seen whether that appointment will be fulfilled.)
The ECB will certainly not adjust its commitment to raise rates by 25bps in July and probably more in September. However, it could try to push back somewhat against expectations that aggressive tightening is likely in Q4 and beyond, which a lower trajectory for rates seeming appropriate if the ECB now sees a greater risk that Fed tightening will push the US (and perhaps the world economy) into recession next year.
Updated
Eurozone trade deficit doubles, industrial production rises
The eurozone’s trade deficit with the rest of the world almost doubled in April from the previous month, after a record expansion in March, while industrial production expanded, official figures show.
The 19 countries sharing the euro ran up a trade deficit of €32.4bn in April, up sharply from €16.4bn in March, according to the EU’s statistics office Eurostat. It compares with a surplus of €14.9bn in April 2021.
Exports rose 12.6% from a year earlier but imports jumped 39.4%, driven by a surge in energy imports.
Meanwhile, industrial production in the eurozone rose 0.4% in April from March, a modest rise.
Updated
Whitbread is among the main risers on the FTSE 100, after the owner of Premier Inn and pub restaurants traded ahead of expectations in the UK and Germany. The shares rose 4.7%.
Premier Inn is the UK’s biggest budget hotel chain and competes mainly with Travelodge. It is struggling to recruit more staff, and is investing up to £30m in pay rises, IT and hotel refurbishments this year.
Chief executive Alison Brittain said:
The strength of Premier Inn’s recovery in the UK continues to be ahead of expectations with a particularly strong first-quarter performance that is well ahead of pre-pandemic levels and we continue to significantly outperform the market.
Labour supply remains tight across the hospitality sector and assuming that consumer demand and occupancy remain strong, we expect some additional costs due to targeted pay increases. We are also taking the opportunity to bring forward our investment in refurbishments and maintenance projects as well as accelerate some additional IT spend that will underpin our market leading position and drive future earnings.
WH Smith is similarly upbeat, as its third-quarter revenues rose above pre-pandemic levels for the first time, with more people travelling to work and a surge in tourism.
The UK retailer, which has stores on high streets, at airports and railway stations, and sells a wide range of items -- from stationery, books, magazines and sandwiches to Bluetooth headphones -- expects its full-year performance to hit the higher end of analysts’ forecasts.
Revenues in the 15 weeks to 11 June were ahead of 2019 levels for the first time at 107%.
Neil Shah, director of research at Edison Group, said:
This is a solid and promising trading update from WHSmith, with the retailer trading ahead of 2019 revenue with a particularly strong performance from its travel division, reflective of the lifting of Covid-19 restrictions.
As passenger numbers recover around the world, WHSmith will look to enhance its ranges in health and beauty and technology to capitalise on post-lockdown opportunities.
In other news, Bloomsbury has reported a record year for sales, as the Harry Potter publisher said the pandemic rise in reading had become “permanent” after lockdown measures eased.
The company benefited substantially from Covid restrictions when homebound consumers turned to new hobbies, including reading, to pass the time, reports my colleague Kalyeena Makortoff.
Bloomsbury’s chief executive, Nigel Newton, said it was clear that people who picked up a reading habit during the pandemic were continuing to buy books, helping to push annual sales up 24% to record highs of £230m for the year to the end of February.
The International Energy Agency has warned that higher oil prices and recession fears will hold back global demand for oil -- while predicting that demand will recover to pre-pandemic levels next year as China’s economy bounces back.
The Paris-based agency said in its monthly report:
Economic fears persist, as various international institutions have recently released downbeat outlooks. Similarly, tightening central bank policy, the impact of a soaring US dollar and rising interest rates on the purchasing power of emerging economies mean the risks to our outlook are concentrated on the downside.
Higher oil prices and a weaker economic outlook continue to temper our oil demand growth expectations. But in 2023, a resurgent China will boost non-OECD demand growth, offsetting a slowdown in the OECD.
World oil demand is forecast to reach 101.6m barrels per day in 2023, surpassing pre-pandemic levels.
Wilson added:
The ECB is kind of stealing the thunder from the Fed today but the US central bank is still the major market event. A lot of banks have changed their forecasts to a 75bps hike and market pricing has move aggressively in that direction. However, I still prefer a 50bps move with the Fed maintaining optionality to do more 50bps hikes for the rest of the year – a strong signal for one in September. Ahead of the meeting the US 10-year yield rose to almost 3.5%, its highest in 11 years, whilst the 2-year yield climbed to 3.45%, a 15-year high.
Neil Wilson, chief market analyst at Markets.com, said about the ECB’s surprise meeting to discuss the recent sell-off in government bond markets:
Given there was a scheduled meeting last week, it smacks of panic and a lack of control, but the market is happy to see it happen. European bank shares rose and the euro also rallied, whilst Italian yields came back down. The ECB is clearly worried that ‘peripheral’ bond yields are rising too much...but this is all a bit of a mess coming so soon after the scheduled meeting last week.
Here we get to the fragmentation risk and a possible new tool we thought they might signal last week, but didn’t. The spread between Italian and German 10-year yields has widened to more than 240 basis points, the widest since March 2020 as the Italian 10-year BTP climbed over 4%. Italian yields have fallen back sharply on the ECB update this morning, however. Italian stocks rallied handsomely, too.
What could the ECB do? That is the big question.
The ECB could probably first reassure the market that it will do ‘whatever it takes’ to prevent fragmentation, but given this meeting has been called abruptly then it might actually feel that it needs to intervene with a new tool – perhaps a yield spread cap of some sort. Or it could reinvest cash from maturing bonds into those sovereign bond markets that need it. This would undoubtedly introduce political risk and would be challenged in the German courts, as would any new tool. Or it could just QE forever... tricky when you are supposed to be tightening financial conditions.
For today it might be enough to tell the market it is working on a new tool/plan in this regard – the lack of detail last week means the Governing Council has not discussed this much and so it might be too early for a specific tool/policy to be announced – plus it has the political and legal dimension to consider too. ECB policymaker Isabel Schnabel said: “Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits.” For a second time, [ECB president Christine] Lagarde has to make sure the market knows the ECB is here to close ze spreads. The fact the ECB didn’t bother with this last week is mystery and shows it is still far too complacent and unwilling to get ahead of the curve.
Updated
Gas prices rise on Gazprom problems
On the commodity markets, gas prices are rising while crude oil prices are little changed.
British wholesale gas for day-ahead delivery has risen more than 8% to 180p per therm.
Yesterday, Russia’s state monopoly Gazprom said it was cutting natural gas supplies to Europe via the Nord Stream 1 pipeline by 40%, according to Interfax. It said its capacity to supply gas was constrained by the delayed return of equipment that had been sent for repair by Siemens Energy.
Gazprom said:
Due to the delayed return of gas pumping units by Siemens from repair, testing of the service life of the GPUs [gas pumping units] and identified technical malfunctions of the engines, only three GPUs can now be used at the ‘Portova’ compressor station.
This has prompted Gazprom to reduce gas supplies to up to 100m cubic metres instead of the usual 167m cm.
Gazprom no longer exports gas westwards through Poland via the Yamal-Europe pipeline following Russian sanctions against EuRoPol Gaz, which owns the Polish section. Flows via Yamal-Europe continue eastwards from Germany to Poland.
There are also fears of liquefied natural gas shortages, after Freeport LNG, operator of one of the largest US export plants producing LNG, said it would shut for at least three weeks after an explosion at its Texas Gulf coast facility last week.
Schmieding goes on to say:
Mind the fundamentals: Some spread widening amid an overall rise in yields is normal. As long as it remains consistent with the inflation backdrop and the pace of nominal growth, it should not present an imminent risk even for fiscally challenged Italy. We expect inflation to settle around 2.5% eventually. Adjusting for such an inflation forecast, the real financing costs of Italy are still quite bearable. Inflation lifts tax receipts and reduces the real value of outstanding debt.
Walking a tightrope to a soft landing: Engineering a soft landing for economies battered by external shocks and facing the highest inflation in decades will be as hard as it sounds for all major central banks. The extra challenge for the ECB is that its policies affect borrowing costs in 19 economies with different fundamentals.
The ECB seems to believe that it can deter excessive “fragmentation” through “constructive ambiguity”, that is by simply warning markets that it may step in under unspecified circumstances. But markets hate uncertainty. They may want to test the ECB’s resolve. To contain the risk of further turmoil that may hurt confidence and economic performance across the Eurozone, the ECB needs to answer two key questions: 1) exactly what tool would it use to prevent excessive fragmentation; and 2) what is the threshold for using it? If the ECB pulls that off, it will have an easier time pursuing its ultimate goal of returning Eurozone inflation to a sustainable rate while running a lower risk of serious economic damage in doing so.
Updated
Holger Schmieding, chief economist at Berenberg Bank, explains:
Periphery under pressure: Even before the European Central Bank (ECB) has hiked rates, Italian, Greek, Spanish and Portuguese spreads versus German bunds are widening amid a broad-based tightening of financial conditions across the Eurozone.
With memories of the European debt crisis still fresh, investors are asking how and under what circumstances ECB president Christine Lagarde would deliver on the promise she made in her blog from 23 May to act against “excessive fragmentation” if required after the end of net asset purchases. Markets sold off after the ECB’s monetary policy statement last Thursday referred only vaguely to a “flexible” use of instruments to safeguard the transmission of monetary policy. In an emergency meeting today, the ECB may finally reveal its hand.
Still far off euro crisis 2.0: The situation today is different from the euro crisis a little more than a decade ago. 1) The ECB has turned into a proper lender of last resort with a tool called “OMT” to intervene heavily for countries that are granted support from the ESM [European Stability Mechanism].
2) Many economies have improved their trend growth through reforms. For example, Greece and Portugal are consistently outperforming the eurozone average with real GDP in Q1 2022 surpassing the pre-pandemic level Q4 2019 by 3.0% and 1.2% respectively, well ahead of the Eurozone as a whole (0.8%) and a still largely unreformed Italy (0.0%).
3) NextGenEU grants of between 5% (Italy) and 9% (Greece) of annual GDP will support public investment and growth over the next four years. 4) Italy’s spread remains well below previous crisis levels.
Italian bond yields tumble, euro rises as ECB set to discuss bond turmoil
Italian bond yields have fallen back on the news that the European Central Bank’s rate-setting governing council will hold an unscheduled meeting this morning to discuss the recent sell-off in government bonds, which had pushed yields sharply higher.
Investors breathed a sigh of relief, after government borrowing costs across the eurozone jumped to multi-year highs this week -- amid growing expectations of an aggressive US interest rate hike later today, and concern about the lack of an ECB plan to tackle signs of strain in eurozone bond markets.
The yield on Italy’s 10-year bond fell 20 basis points to 4%, down from eight-year highs hit this week. Spanish, Portuguese and Greek bond yields were also down sharply in early London trade.
The euro rose on the news and is currently trading 0.6% higher at $1.0477 against the dollar.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, told Reuters:
We should get a statement along the lines reflecting a willingness to act and then maybe they will also task committees to work on options, this is what was missing from last week [when the ECB had a scheduled meeting].
ECB board member Isabel Schnabel, the head of the central bank’s market operations, said yesterday that the ECB was “closely” monitoring the situation and was ready to deploy both existing and new tools if it found that the market moves were “disorderly”.
We might get an @ecb statement along the lines of @Isabel_Schnabel's speech. Some details about PEPP reinvestments would be welcome. And they could task the relevant committees to work on policy options for a backstop, which they didn't do at the June meeting.
— Frederik Ducrozet (@fwred) June 15, 2022
We'll see if and when we get more details, but the main message is that the Governing Council is taking this seriously. Last week's big disappointment was that apparently they did not even discuss fragmentation much. https://t.co/417KkGsg3h
— Frederik Ducrozet (@fwred) June 15, 2022
Updated
European shares rally as ECB holds surprise meeting
And we’re off. European shares have notched up some decent gains at the open, following increases in several Asian markets (Hong Kong’s Hang Seng rose 1% while Japan’s Nikkei edged down 0.1%).
- UK’s FTSE 100 up 58 points, or 0.8%, to 7,425
- Germany’s Dax up 1.3%
- France’s CAC up 1.3%
- Spain’s Ibex up 1.5%
- Italy’s FTSE MiB up 650 points, or 2.9%, at 22,495
Updated
Introduction: Markets on tenterhooks, dollar hits 20-year peak ahead of Fed rate decision
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
Markets are on tenterhooks, and the dollar hit a 20-year peak ahead of the interest rate decision from the US Federal Reserve later today. Investors are waiting to see how aggressive America’s central bank will be in raising rates, with fears that a bigger hike could tip the economy into recession.
The question is whether the Fed will raise its main interest rate, currently at 1%, by 0.50 or 0.75 percentage points to tackle soaring inflation. The latter would be the biggest increase since 1994. The dollar hit a 20-year high against a basket of currencies, and rose to 135.60 against the yen, the highest since 1998.
The European Central Bank is to hold an unscheduled meeting this morning to discuss the recent sell-off in government bond markets. Bond yields have risen sharply since the ECB promised a series of rate rises last Thursday and the spread between the yields of German bonds and those of more indebted southern nations, particularly Italy, soared to the highest in more than two years.
Stock markets have been plunging in recent days, and on Wall Street the benchmark S&P 500 fell almost 4% into bear territory on Monday. Analysts at Goldman Sachs said:
Against a backdrop of sky-high inflation, rising rates and growing recession concerns, the S&P 500 has had its worst start to the year since 1962. A likely coming peak in inflation is probably not sufficient to see the bottom, and in the past similar drawdowns have only ended when the Fed has shifted towards easier policy.
The pound fell yesterday to its lowest level against the dollar since the onset of the Covid pandemic amid growing concern over the strength of the British economy. It traded below $1.20 for the first time since March 2020, as the dollar strengthened, but is back above $1.20 this morning. The Bank of England is expected to raise interest rates by 0.25 percentage points on Thursday, lifting its base rate to 1.25%.
Michael Hewson, chief market analyst at CMC Markets UK, said:
A responsible Fed would look to wrestle back the narrative and do what it said it would do, which means we need to see 50 basis points today, with a hawkish pivot at the very least, especially if it wants to be taken seriously when it comes to future guidance.
It’s also not apparent what a pivot to 75bps would achieve when the Fed could simply deliver a 50bps hike today and then throw the prospect of 75bps into the hat for July, as well as September. Given that market pricing had been for a possible pause in September that is still a hawkish pivot, and guidance tends to be half the battle when it comes to policy adjustments.
As such it seems more likely we’ll see a 50bps move today, along with hawkish guidance for 75bps in July, as well as September, but very much dependant on the data.
There was some good news out of China, where the economy showed signs of recovery, as industrial output grew 0.7% in May from a year earlier, after falling 2.9% in April, according to official figures released today. China’s exports grew in double digits last month, as factories cranked up again following the easing of Covid restrictions.
However, consumer spending remains weak because of China’s zero-Covid policy, with full or partial lockdowns in dozens of cities in March and April. Retail sales fell 6.7% in May, an improvement from April’s 11.1% slump.
Iris Pang, chief China economist at ING, said:
Activity data paints an economic recovery picture in May, but only a slow one. The government is likely to respond to this economic weakness by delivering more fiscal stimulus.
In Asia, stocks were mixed and European markets are expected to open slightly firmer after the better-than-expected Chinese data.
The Agenda
- 9am BST: IEA Oil market report
- 10am BST: Eurozone trade and industrial production for April
- 1.30pm BST: US retail sales for May
- 7pm BST: US Federal Reserve interest rate decision (forecast: 1.5%)
- 7.30pm BST: US Federal Reserve press conference
Updated
