Closing summary
The Bank of Canada has just raised interest rates by 100 basis points, more than expected, to 2.5%, citing “higher and more persistent” inflation than anticipated.
Higher gasoline and food prices have pushed US inflation to a new 40-year high of 9.1%. The data cemented expectations of a 75 basis point rate hike from the Federal Reserve at the end of this month, and more aggressive rate hikes further out.
European shares sold off on the news, oil prices fell with Brent crude heading below $100 a barrel, and the dollar index jumped to a 20-year high. Stocks on Wall Street are also down.
The euro briefly dropped below parity against the dollar for the first time in almost two decades. At 1.45pm BST, it was changing hands at $0.998, down 0.4% on the day, its lowest level since December 2002. It is now trading a $1.0017, down 0.2% on the day. Sterling is trading at its lowest levels since March 2020, down 0.2% at $1.1863.
The single currency has lost more than 10% so far this year, battered by fears over recession and Europe’s energy crisis because of Russia’s invasion of Ukraine
The UK economy grew by by 0.5% in May, rather than showing no change as expected, fuelled by a holiday boom and a big rise in GP appointments. But economists warn that this strength could be short lived amid the cost of living crisis, and the think tank NIESR said it was ‘touch and go’ as to whether the economy entered recession in the second quarter. Here is our analysis of the data.
Our other main stories:
Thank you for reading. Take care and enjoy the sun if you can. We’ll be back tomorrow. Bye! - JK
Bank of Canada hikes rates by 100bps
The Bank of Canada has raised interest rates by 100 basis points to 2.5% – while markets had been expecting a small hike of 75bps. The central bank said in a statement:
Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report, and will likely remain around 8% in the next few months. While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%.
Updated
On Wall Street, the Dow Jones fell 375 points, or 1.2%, to 30,605 at the open. The S&P 500 lost 51 points, or 1.4%, to 3,767 while the tech-heavy Nasdaq declined 194 points, or 1.7%, to 11,070.
James Knightley, chief international economist at ING, said:
This is the fastest rate of headline inflation since November 1981 with the only crumb of comfort being that it didn’t come in as high as the fake report doing the rounds yesterday suggesting a 10% headline reading.
US inflation is above 9%, but it is the breadth of the price pressures that is really concerning for the Federal Reserve. With supply conditions showing little sign of improvement the onus is the on the Fed to hit the brakes via higher rates to allow demand to better match supply conditions. The recession threat is rising.
The Federal Reserve now acknowledges the onus is on them to hit the brakes on demand via higher interest rates. But by delaying their response and now having to move policy faster and deeper into restrictive territory, there is clearly the fear of a recession. The Fed has accepted that weaker growth is the price we have to pay to get inflation under control
We continue to expect 75bp hike in July with 50bp moves in September and November, followed by a 25bp hike in December taking the Fed funds range to 3.5-3.75% by year-end.
Here is a longer story on the jump in US inflation to 9.1% in June:
“Another inflation shocker nails on a 75bp hike this month,” said Michael Pearce, senior US economist at Capital Economics.
The stronger than expected 1.3% [monthly] rise in consumer prices in June, pushing headline inflation to 9.1%, from 8.6%, nails on another 75bp hike at the July meeting but, with commodity prices falling sharply since then and wage growth moderating in recent months, the outlook for inflation does not look as bleak as it did a month ago. Accordingly, speculation about a 100bp hike this month looks to be misplaced.
The 7.5% m/m rise in energy prices contributed half of that increase, with gasoline prices up by 11.2% and piped gas prices rising 8.2%. The good news is that the collapse in wholesale prices in recent weeks suggests those moves will fully reverse this month. The 1.0% rise in food prices was driven in part by higher cereal and dairy prices. Again, with agricultural commodity prices falling, those large gains should be reversed in the coming months.
Stripping out food and energy, core prices were up by a larger 0.7%. Shelter prices rose by 0.6%, the same as in May, but that was only because hotel prices declined by 2.8%, with rents rising by a stronger 0.8% m/m, the largest monthly increase since 1986, while owners’ equivalent rents were up 0.7%.
With wage growth slowing sharply in recent months, those stronger cyclical pressures won’t last forever, but the inherent lags in measuring rents means those components are still accelerating for the time being. Elsewhere, core goods prices rose by a stronger 0.8% last month, with a further rise in new and used auto prices, while apparel prices increased by 0.8%. There are some signs that easing goods shortages are feeding through to weaker price pressures, with furniture prices up by a slightly smaller 0.4% and the recreation index up by 0.3%, but with inventories still lean across the economy as a whole, broader price pressures remain intense.
Overall, this report confirms that the Fed will need to hike by 75bp again at the end-July meeting. While some will draw parallels with the shockingly bad May CPI report, the backdrop is markedly different - commodity prices have fallen sharply and we’ve seen clearer signs of an economic slowdown, both of which will contribute to weaker price pressures ahead. That in turn should help to contain expectations that Fed officials will opt for an even larger 100bp hike.
Alastair George, Chief Investment Strategist at Edison Group, said:
Today’s CPI report shows US inflation meaningfully above consensus expectations at 9.1%, defying recent hopes for a rapid decline in US inflationary pressure. Market interest rate expectations have surged in response, with interest rate futures now pricing in a US Fed Funds rate of over 3.5% by year-end.
Furthermore, the US dollar has now broken parity to the euro for the first time in 20 years. We expect growth stocks to be down sharply today following a run of outperformance. We believe inflation in the US and elsewhere is likely to decline only slowly, leaving central banks in the uncomfortable position of tightening policy into a slowing economy - and with precious few other policy options with inflation so far above target.
Euro drops below parity vs dollar
The euro briefly dropped below parity against the dollar for the first time in almost two decade, as the dollar index jumped after US inflation jumped more than expected to 9.1%.
At 1.45pm BST, it was changing hands at $0.998, down 0.4% on the day, its lowest level since December 2002. The single currency has lost more than 10% so far this year, battered by fears over recession and Europe’s energy crisis because of Russia’s invasion of Ukraine.
The sell-off on European stock exchanges has accelerated sharply since the US inflation numbers.
- UK’s FTSE 100 index down 102 points, or 1.4%, at 7,107
- Germany’s Dax down 200 points, or 1.54%, at 12,705
- France’s CAC down 81 points, or 1.4%, at 5,962
- Italy’s FTSE MiB down 431 points, or 2%, at 21,051
Wall Street stock futures have turned negative on the hotter-than-expected inflation data and crude oil prices are now also falling.
The pound and the euro are now down against the dollar, by about 0.3%, as the inflation figures bolstered expectations of another 75 basis point rate hike from the Federal Reserve at the end of the month. The US dollar index hit a 20-year high of 108.57.
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BREAKING: US inflation rate accelerated in June to 9.1%, highest since late 1981 (well above Wall Street expectations) | #OOTT
— Javier Blas (@JavierBlas) July 13, 2022
US inflation hits new 40-year high of 9.1%
US inflation has come in higher than expected at an annual rate of 9.1% in June (versus expectations of 8.8%), a new 40-year high, and up from 8.6% in May. The core rate, which excludes food and energy costs, edged down to 5.9% from 6%.
In about three minutes, we’ll be getting the latest inflation figures for the US. Economists have pencilled in a further rise in inflation to a new 40-year high of 8.8%. Core inflation is expected to drop from 6% to 5.8%.
Ahead of the data, European stock markets are still falling while the pound and euro have both strengthened 0.3% against the dollar, coming off their two-year and 20-year lows respectively.
Thanim Islam, market strategist at international business payments specialist Equals Money, said:
The dollar index came off 20-year highs with the sell-off supported by buying into recent battered currencies of the yen and the euro, each rebounding off their lows last seen in 1998 and 2002 respectively.
UK watchdog investigates Morrisons' purchase of McColl's
Britain’s competition watchdog has started investigating if Morrisons’ acquisition of 1,160 McColl’s convenience stores would lead to less competition.
The UK supermarket bought the stores in a so-called pre-pack administration. The Competition and Markets Authority has set a deadline of 8 September for its initial decision.
Morrisons’ which is lagging behind market leader Tesco, along with Sainsbury’s and Asda, has a wholesale supply deal with McColl’s. More than 200 McColl’s shops have been converted to Morrison’s Daily stores, with a target of 450 by November.
IEA: oil market 'walking a tightrope'
The global oil market is “walking a tightrope” between scarce supply and the possibility of a recession, the Paris-based International Energy Agency said today, as higher prices and worsening economic conditions are already affecting demand.
The IEA said in its monthly report:
Rarely has the outlook for oil markets been more uncertain. A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side.
For now, weaker-than-expected oil demand growth in advanced economies and resilient Russian supply [has reduced market tightness].
But it trimmed its demand outlook for this year by just 200,000 barrels per day. The agency is now forecasting an annual rise of 1.7m bpd in 2022 and 2.1m bpd in 2023, led by strong growth in emerging economies.
The IEA also said that even though Russian oil exports have hit their lowest levels since last August, the country’s revenues from crude increased $700m month on month to $20.4bn, 40% above last year’s average, because of higher oil prices. The profits supported Russia’s invasion of Ukraine, a situation the IEA described as “untenable”.
Discussions are ongoing to identify a solid market mechanism to ensure effective implementation and enforcement [of a cap on the Russian oil price].
Inflation picks up in France, Spain; food prices high in Germany
The French inflation rate was confirmed at 5.8% in June, the highest level on record and up from 5.2% in May, driven by a 33% surge in energy prices.
The final estimate from the French statistics office confirmed the initial estimate and was the highest since records began in 1997.
In Spain, inflation jumped to 10.2% last month from 8.7%, marking the highest rate since 1985.
French economy shows resilience amid record inflation, Ukraine war https://t.co/HkBRH0sHVU via @WHorobin pic.twitter.com/KHz9Uo89UG
— Zoe Schneeweiss (@ZSchneeweiss) July 13, 2022
In Germany, inflation was 7.6% in June, pushed up by higher energy costs and a jump in food prices to an annual rate of 12.7%.
Good Morning from #Germany where food prices jumped 12.7% YoY in June, the highest food price #inflation since the start of the statistic. pic.twitter.com/d7NdbFXyFR
— Holger Zschaepitz (@Schuldensuehner) July 13, 2022
Returning to the UK’s economic growth of 0.5% in May, here is some analysis by US investment bank Citi (summarised by Andy Bruce, economics reporter at Reuters):
Citi: "Today's upside GDP surprise is attributable to three factors: 1) a recovery in industrial supply; 2) resilience within construction and 3) a bounce in public sector output. In each case, we do not think these are indicative of a more profound shift in momentum."
— Andy Bruce (@BruceReuters) July 13, 2022
Updated
Markets: gas prices rise amid fears over Norwegian supplies
European stock markets are sliding. The UK’s FTSE 100 index has lost 54 points, or 0.76%, to 7,155. Germany’s Dax is down 84 points, or 0.65%, at 12,820, France’s CAC has slipped 20 points, or 0.3%, to 6,023 and Italy’s FTSE MiB has lost 187 points, or 0.87%, to 21,298.
The euro and the pound are little changed on the day. The euro is still flirting with parity versus the dollar, trading at $1.0033, a 20-year low, while sterling is at $1.1888, the lowest since the onset of the Covid pandemic in March 2020.
Crude oil prices are climbing again, reversing earlier declines. Brent crude is $1.32 ahead at $100.78 a barrel, while US light crude has added $1.25 to $97.09 a barrel.
British and Dutch wholesale gas prices are also up, fuelled by worries over Norwegian supplies after an unplanned outage resulted in a loss of 70m cubic metres a day of production, affecting exports to the UK and Europe.
Both the British day-ahead and the within-day contracts rose by 60p to 300p per therm – up 25% and 27% respectively – while the contract for weekend delivery increased 50p, or 22%, to 280p per therm.
Both the Dutch benchmark month-ahead contract and day-ahead contracts rose around 5%, to €183.25 and €183.50 per megawatt hour respectively
Industrial production improved in the eurozone in May, when it rose by 0.8% from April. It picked up from April’s 0.5% growth, according to data from Eurostat, the EU’s statistical office.
However, Germany, Europe’s economic powerhouse, lagged with just 0.1% growth in May after a 2% jump in April, while French production slipped by 0.1%, following a 0.2% drop in the previous month.
Wetherspoon hit by WFH and inflation
The pub chain JD Wetherspoon has warned of full-year losses after being forced to raise staff wages amid a recruitment crisis, higher spending on repairs and marketing and a slow recovery in bar trade. The profit warning sent its share price down more than 10%.
Wetherspoon, which has more than 800 pubs across the UK and Ireland, is forecasting a loss of £30m for the year to the end of July, after previously saying that it would break even. It partly blamed the working from home trend for the “slower and more laborious than anticipated” recovery.
The chair of Wetherspoon, Tim Martin, pointed to rising inflation and the “unintended consequences” of the government’s coronavirus lockdowns, including many people leaving the workforce via early retirement.
Many people now work from home, rather than from offices, which has had a significant impact on transport and hospitality businesses.
The ‘fear factor’, used by governments to encourage compliance with lockdowns and restrictions, has also had lingering after-effects, with many people remaining cautious about leaving their homes.
The group’s latest trading update showed like-for-like sales in the first 11 weeks of its fourth quarter to July 31 were 0.4% below the same pre-pandemic period in 2019. However, this was an improvement on the previous quarter, when they fell 4%.
Sales of draught ales, lagers and ciders - previously the biggest driver of pub trade - were 8% below 2019 levels, it revealed.
Many people predicted a boom in pub sales when lockdowns and restrictions ended due to pent-up demand, but recovery for many companies has been slower and more laborious than was anticipated.
Laura Ashley auditor fined
The UK accounting watchdog has “severely reprimanded” the auditor of the fashion retailer Laura Ashley, which collapsed into administration during the pandemic, and fined it £300,000.
The Financial Reporting Council said it had fined UHY Hacker Young for its failings in its audit of the retailer for the financial years ending June 2019 and 2018. Martin Jones, a partner at the firm, also received a severe reprimand, along with a £45,000 fine. The penalties were discounted for admissions, so the firm will pay £217,500 and Jones £32,625.
Laura Ashley’s revenues and profits declined between 2016 and 2019 and its loss after tax increased tenfold from £1.4m in 2018 to £14m in 2019, but the audit reports noted no material uncertainty related to the use of the going concern assumption, the watchdog said.
Jamie Symington, deputy executive counsel at the FRC, said:
The breaches in this case were serious and spanned two audit years affecting multiple areas of the audits, some which were fundamental to the proper conduct of audit. These included the auditors’ failure to adequately challenge or investigate management’s use of the going concern assumption - i.e. that the company would remain in business for the foreseeable future - despite this being identified as a significant risk for the financial year 2018 audit due to the state of the retail sector.
UHY further failed to respond appropriately to criticism of their work by the FRC’s audit quality review team, leading to a repeat in the FY2019 audit of certain breaches which occurred in the FY2018 audit.
Crisis, what crisis? Stagflation, what stagflation? On the face of it the solid rise in UK economic activity in May suggests the outlook is not as bad as previously feared, writes our economics editor Larry Elliott in his analysis of today’s GDP figures.
No question, the monthly estimate of growth from the Office for National Statistics was a surprise for the financial markets – and for once a surprise on the upside.
The City had been expecting gross domestic product to expand by 0.1% rather than the actual 0.5% increase. April’s decline was also smaller than originally thought – 0.2% instead of 0.3%.
Even so, a look beneath the bonnet of the economy shows evidence of the strains caused by rising inflation, especially in the services sector – which accounts for about 80% of GDP.
Boohoo starts charging for returns
Online fashion specialist Boohoo has become the latest retailer to start charging shoppers to return items, writes Joanna Partridge.
Boohoo customers will now have to pay £1.99 when they send unwanted goods back, and the cost will be deducted from the amount they are refunded.
The move by the retailer, which was first reported by Retail Week, came into effect on 4 July.
If shoppers make multiple returns from the same order, they will be charged the returns fee each time.
Other high street retailers including Next and Uniqlo already charge for returns, while Zara said earlier this year that it was introducing a £1.95 fee for online returns.
Asos said last month that it was facing a “significant increase” in returns from shoppers, contributing to its latest profit warning.
NIESR: 'touch and go' whether UK economy entered recession in Q2
The National Institute of Economic and Social Research, a respected UK think tank, has tweeted:
With plenty of room for revisions, it looks like touch and go as to whether or not the UK economy entered recession in the second quarter.
If April #activity was more encouraging than the headline figure suggested – with strong consumer-facing #services dragged down by the reduction in #vaccinations – the opposite may be true in May. Headline growth of 0.5% owed much to rising #GP visits, while sectors like
— National Institute of Economic and Social Research (@NIESRorg) July 13, 2022
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European stock markets have slipped at the open, as expected. The FTSE 100 index in London is down 25 points, or 0.36%, at 7,184 while the CAC in France has lost 0.5%, the Ibex in Madrid slid 0.4% and the Dax in Frankfurt fell 0.7%.
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Suren Thiru, economics director for the Institute of Chartered Accountants in England and Wales, warns that the UK economy remains “perilously close to recession” despite the better than expected 0.5% growth in May.
The latest figures confirm that there was a better than expected rally in economic activity in May. While all sectors reported solid growth, the key services sector was the largest contributor to overall GDP growth, reflecting a large rise in GP appointments.
Solid growth in May should be followed by a notable drop in output in June as the working days lost due to the Jubilee bank holiday and surging inflation – including from record fuel prices – drag on activity.
The UK economy remains perilously close to recession. Prolonged political uncertainty could weaken economic conditions by stifling investment and adding to inflation, through triggering further falls in sterling’s value.
While targeted fiscal support is required to protect people and businesses who are being hardest hit, more focus is needed to ease the supply side constraints that continue to stoke inflation and limit economic activity.
Here's something important about the latest #GDP data that most will miss... 🤓
— Julian Jessop 🇬🇧 🇺🇦 (@julianHjessop) July 13, 2022
Excluding #NHS Test and Trace and the vaccines, UK GDP rose by 0.7% m/m in May and by between 0.4% and 0.8% in each of the first five months of the year 👍
source: https://t.co/L28b5gOxfX pic.twitter.com/9i7fZyhYq5
Summer in the City of London: as the mercury climbs you can leave your tie at home – and even brave a pair of shorts and trainers, writes my colleague Joanna Partridge.
Companies based in the capital’s financial district have for years adhered to more traditional dress codes than other employers, with many firms demanding “business casual” from their staff, whatever the weather.
Yet in the post-pandemic, more flexible world of work, employees are working out how to remain office appropriate while trying to beat the heat, when the mercury reaches 30C, as it did in central London on Tuesday.
A striped bow tie, linen jacket and straw hat were one law firm employee’s concessions to the temperature.
“I usually wear a long tie but I feel less encumbered with this [bowtie],” said Jake, who did not want to give his surname. “I’m not ready to let go of ties completely.”
Carrying his briefcase as he walked along Cornhill, he said he would not usually wear a linen jacket: “But when it’s too hot I make an exception. I’m not very good in the heat.”
An open white or blue shirt worn with trousers or chinos appeared to be the unofficial uniform among men, while there was greater variety among the outfits worn by female workers.
Updated
Victoria Scholar, head of investment at interactive investor, sums up the GDP figures and looks at what they mean:
UK GDP rose by 0.4% in the three months to May topping expectations for 0% while monthly growth increased by 0.5% in May, also ahead of estimates for 0% and swinging from a negative reading of -0.2% in April. Services, manufacturing and construction all posted positive growth with services output the largest contributor, rising 0.4% in May thanks to a jump in GP appointments, lifting monthly GDP to 1.7% above its pre-pandemic levels. However, consumer-facing services fell by 0.1% in May driven by a drop in retail trade including motor vehicle and motorcycle repair services.
Amid fears of a recession, disappointing retail sales figures and record low consumer confidence data, this morning’s figures come as a welcome reprieve with this morning’s positive GDP figures allaying some growth concerns after April’s surprise negative reading. Despite the wind-down of the NHS test and trace and vaccination programmes, health was the biggest contributor to growth. The surge in post-pandemic demand for international travel and the transportation of goods across the country also contributed to May’s expansion.
The pound is trading modestly higher against the US dollar but is still languishing close to two-year lows as recent greenback strength continues to weigh on a number of currencies including sterling and as UK political and economic uncertainty remains.
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Kitty Ussher, chief economist at the Institute of Directors, said:
This is reassuring news for business leaders, who we know have been feeling worried about the state of the economy.
Although consumer-facing services are still below their pre-pandemic levels, its important to remember that this category includes commuter travel so will have been permanently affected by the shift to home-working.
And while many people are undoubtedly feeling the pressure on household bills, the much publicised weakening in retail sales is also partly offset by consumers switching back to spending on the separate category of tourism travel.
Overall there’s nothing in this data that will prevent the Bank of England from continuing to raise interest rates when it meets over the summer.
The ONS talks of “increased confidence in holiday booking following the end of Covid restrictions”.
Meanwhile, retail sales were down 0.5% in May.
Here is our story on the UK’s return to growth in May.
Monthly GDP is now estimated to be 1.7% above its pre-pandemic levels (February 2020).
Production grew by 0.9% in May, driven by 1.4% growth in manufacturing and a 0.3% rise in electricity, gas, steam and air conditioning supply.
Construction output increased by 1.5% in May and is now at its highest level since monthly records began in 2010.
More reaction.
Decent UK #GDP numbers for May (consistent with message from PMIs)... 👍
— Julian Jessop 🇬🇧 🇺🇦 (@julianHjessop) July 13, 2022
Headline growth of 0.5% helped by more GP appointments - but this is still activity which improves welfare.
Other services holding up well given #inflation crisis, and production and construction both up. pic.twitter.com/ETnbU9QZY1
Services output rose 0.4% in May, as human health and social work activities grew by 2.1%. There was a “large rise in GP appointments” in May, which offset the scaling down of the NHS test and trace and Covid-19 vaccination programmes, the ONS said.
Only in the UK would a jump in GP appointments trigger an upside surprise in GDP data during a cost of living crisis https://t.co/iCl0woSfwe
— Anthony Barton (@ABartonMacro) July 13, 2022
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The new chancellor of the exchequer, Nadhim Zahawi, was quick to respond to the figures.
It’s always great to see the economy growing but I’m not complacent. I know people are concerned so we are continuing to support families and economic growth.
We’re working alongside the Bank of England to bear down on inflation and I am confident we can create a stronger economy for everyone across the UK.
UK economy grows 0.5% in May
The UK economy has surprised us with 0.5% growth in May, following April’s 0.2% decline (revised from a 0.3% drop). Growth was fuelled by a boom in holiday bookings and a large rise in GP appointments.
And over the three months to May, GDP rose 0.4%, according to figures from the Office for National Statistics. Economists had expected zero growth in May alone, and in the three months to May, amid the cost of living crisis.
Updated
News overnight: Twitter sued Elon Musk on Tuesday to force him to complete his $44bn takeover of the social media giant after he announced on Friday he would withdraw his bid, writes our west coast technology reporter Kari Paul.
“Musk’s exit strategy is a model of hypocrisy,” the lawsuit said, accusing the billionaire of making “bad faith” arguments against Twitter and carrying out “public and misleading attacks” on the company.
The suit has kicked off what could be a long legal saga regarding the failed merger. The Tesla CEO and richest man on Earth had reached a deal to buy Twitter on 25 April, offering to purchase all of the company’s shares for $54.20 each, but he began to back out over allegations of “spam” accounts on the platform.
The UK’s failure to get serious about inequality and weak growth over the past 15 years has left the average British household £8,800 poorer than its equivalent in five comparable countries, research has found, writes our economics editor Larry Elliott.
A “toxic combination” of poor productivity and a failure to narrow the divide between rich and poor had resulted in a widening prosperity gap with France, Germany, Australia, Canada and the Netherlands, the report from the Resolution Foundation said.
The thinktank said that if the UK matched the average income and inequality levels of those countries, typical household incomes in Britain would be a third higher and those of the poorest households two-fifths greater.
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Introduction: UK GDP report due amid cost of living crisis
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
We will get a new health check on the UK economy this morning as May’s GDP numbers are released.
The official data, due at 7am BST, comes amid concerns that Britain could be hurtling towards recession, as households and businesses are gripped by a cost of living crisis.
Analysts are forecasting that Britain’s economy ground to a halt in the three months to May, following 0.2% growth in the previous three months. GDP in May alone is also forecast to show no change, after April’s 0.3% decline.
We are also getting UK trade and industrial production figures at the same time, as well as the final estimate for German inflation in June (forecast: 7.6%), followed by final estimates for French and Spanish inflation a bit later.
Michael Hewson, chief market economist at CMC Markets UK, said:
The most recent April GDP numbers showed that the UK economy contracted by 0.3%, a much bigger decline than was expected. On the face of it the numbers were very disappointing, however the fall was largely driven by the end of the NHS test and trace program, as the Covid free testing regime came to an end. Given that this is a one-off effect, and won’t be repeated, the actual numbers, although poor, weren’t as bad as they appear, despite the difficult macro backdrop.
As we look to today’s May numbers the outlook isn’t likely to improve significantly even if we see a modest improvement. Fuel prices are set to go even higher with daily reports of record highs for diesel as well as petrol, as it becomes more and more expensive to fill up. At some point this will lead to demand destruction as consumers prioritise spending on essentials.
Philip Shaw, chief economist at Investec, said:
It is likely the rising cost of living continued to impact the UK economy, which is unlikely to be offset by a potential rebound in the production sector from a weak April. We expect that UK GDP contracted by 0.2% in May, relative to April.
What will likely be the most-watched release is the US CPI [consumer price index] report. Last month’s unexpected jump to 8.6%, when many thought inflation had peaked, helped trigger the Fed’s 75 basis point rate increase.
This afternoon, the highlight is US inflation for June, with economists forecasting a rise to a new 40-year high of 8.8% from 8.6%.
The Bank of Canada is expected to raise interest rates again today, by 75 basis points to 2.25%, foreshadowing a similar move by the US Federal Reserve at the end of this month.
On the markets, the euro remains in focus. The single currency was within a whisker of hitting parity against the dollar yesterday, hit by fears of recession and an energy supply crisis, and sank to $1.00001 at one stage. It is now trading at $1.003, its lowest level in 20 years and down almost 12% this year. The pound also hit a fresh two-year low below $1.19 yesterday, and is currently at $1.1901, up 0.1% on the day.
Asian stock markets have eked out some modest gains, with Japan’s Nikkei rising 0.4%, Hong Kong’s Hang Seng and the Shanghai composite gave up earlier gains and were flat. European stock markets are expected to slip at the open.
The Agenda
- 9am BST: International Energy Agency oil market report
- 10am BST: Eurozone industrial production for May
- 1.30pm BST: US inflation for June (forecast: 8.8%)
- 3pm BST: Canada interest rate decision (forecast: 2.25% from 1.5%)
Updated
