director Citadel Global
ECB SETS SIGHTS ON HIGHER INTEREST RATES
Inflation has been topping the agenda for central banks across the world and the European Central Bank (ECB) is no different. This week saw the ECB committing to entering a hiking cycle starting as early as July.
Key themes for this week include:
· ECB to end net asset purchases as of 1 July 2022
· United Kingdom (UK) natural gas futures prices surge 30%
· United States (US) jobless claims rise more than expected
· The World Bank cuts global growth forecasts
· South Africa’s GDP grows more than expected
25 BASIS POINT ECB RATE HIKE EXPECTED IN JULY
Yesterday, the ECB announced that it reached a decision, during its June Monetary Policy Committee meeting, that the bank will end net asset purchases under its Asset Purchasing Programme as of 1 July 2022. The Bank also intends to raise the key ECB interest rates by 25 basis points in July.
The anticipated interest rate hike will be the first increase in borrowing costs for the eurozone in over a decade, as inflation across the region continues to rage. The ECB is also expected to raise borrowing rates in September, with that rate increase likely to exceed the upcoming increase in July, should the inflation outlook deteriorate even further.
The EU’s Governing Council has committed to applying policy measures that it believes will see EU inflation stabilise to the 2% mark over the medium term. The consistent rise in energy and food prices saw May’s inflation rise by more than expected, yet again, while price pressure continues to broaden across all segments, with significant increases in the prices of most goods and services.
Updated Eurosystem staff projections foresee annual inflation at 6.8% in 2022, before it is projected to decline to 3.5% in 2023 and 2.1% in 2024. These numbers have been revised upwards from projections made in March. Inflation, excluding energy and food, is projected to average 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024, also revised upwards from March projections. Meanwhile, the growth outlook was revised lower, to 2.8% for 2022 and 2.1% in 2023. The economy is, however, expected to expand faster in 2024. The key refinancing operations rate currently stands at 0%, the marginal lending facility rate is at 0.25%, while the deposit lending rate at -0.5%.
DATA IN A NUTSHELL
US initial jobless claims increased by 27 000 to 229 000 in the week ended 4 June, its highest level since mid-January and above market forecasts of 210 000. Claims, however, remain below the 200 000 to 250 000 range, which is viewed as consistent with healthy labour market conditions.
The number of employed persons in the euro area rose by 0.6 % quarter-on-quarter to 162.9 million in the first three months of 2022, accelerating from 0.4% growth in the previous period and above market expectations of 0.5%.
The S&P Global/CIPS UK Composite PMI (purchasing managers index) was revised higher to 53.1 in May, from a preliminary reading of 51.8. The reading reflected substantial monthly declines for both manufacturing and service sectors. UK private sector firms recorded a slowdown in growth of business activity and new orders, as cost pressures dented consumer demand.
The South African economy expanded 3% year-on-year in the first quarter of 2022, accelerating from 1.7% growth in the previous period, matching market forecasts. It was the fastest pace of growth since the second quarter of 2021. Meanwhile, South Africa’s RMB/BER Business Confidence Index fell to 42 in the second quarter, down from 46 in the previous period. This is its lowest level since the first quarter of 2021. The corrosion of business sentiment was mainly felt by manufacturers and new vehicle dealers, due to ongoing supply chain constraints and the temporary closure of the Toyota plant in Durban, following the devastating floods in April. Manufacturing production in South Africa plunged by 7.8% year-on-year in April, much worse than the expected 2.6% contraction. It marks the second consecutive month of tumbling manufacturing activity.
Imports to China rose by 4.1% year-on-year in May, beating market expectations of a 2% rise. The latest figure also marked the first expansion in inbound shipments in three months, as domestic demand recovered, following an easing of COVID-19 curbs in major cities, including Shanghai and Beijing. Exports soared by 16.9% year-on-year in May, also beating market expectations. The latest figure also marked the steepest increase in outbound shipments since January, as factory production resumed, and logistics issues eased.
On Tuesday, the World Bank slashed its global growth forecast to 2.9% for 2022 and warned that the global economy could slip into a period of stagflation reminiscent of the 1970s. World Bank President, David Malpass, said that if this happens, many countries would find it extremely difficult to avoid an economic recession.
INVESTORS ON EDGE
All three major US stock indices opened lower on Thursday, investors continue to assess the outlook for inflation and economic growth ahead of Friday’s highly anticipated May US Consumer Price Report. An above-expected inflation reading could reinforce expectations that the US Federal Reserve (Fed) will continue to aggressively hike rates in the second half of this year, even with signs of economic slowdown and a tight job market, while any signs of a potential peak in inflation could trigger a relief rally. On the corporate side, discount retailer, Five Below, dropped roughly 3% after missing Wall Street’s estimates. Tech and electric car giant, Tesla, also came into the spotlight, rising almost 3% after global financial services firm, UBS, upgraded the stock to buy.
The blue-chip FTSE 100 tumbled to around the 7 550 level on Thursday. Sentiment remains fragile as worries about the impact of further interest rate hikes – as the Bank of England (BoE) tries to reign in high inflation – weigh on investors. On an individual stock basis, retailers, J Sainsbury and Kingfisher, were among the biggest losers on the index, down 4.8% and 3.2%, respectively.
European stocks extended losses on Thursday after the ECB set the path to start hiking rates in July. Sentiment remains friable as the economic outlook remains subdued with inflation projected to stay elevated. At time of writing, the DAX was down nearly 2%.
The South African-based JSE FTSE All-Share Index traded 0.6% softer during volatile session on Thursday, following the ECB confirmation that its bond-buying program will end as soon as July. Investors now turn their attention to US consumer inflation numbers due on Friday for signs that inflation in the world’s largest economy is peaking. In corporate news, fashion retailer, Mr Price, reported strong growth for the year ended 2 April 2022.
NATURAL GAS SKYROCKETS
UK natural gas futures surged almost 30% to trade above 170 pence-a-therm, rebounding from their lowest level in over a month, after an explosion at the Freeport oil and gas export terminal in Texas threatened international supplies. The availability of US liquified natural gas has become a crucial element of European gas supply in the last couple of months, as major buyers have scrambled to secure options for Russian gas in the wake of Russia’s invasion of Ukraine.
Brent crude held above $123 per barrel on Thursday after gaining 2.5% in the previous trading session, amid signs of further market tightness in US crude inventories. International Energy Agency data showed that crude stocks at the Cushing Hub dropped to their lowest levels since early March, while gasoline inventories are at their lowest seasonal levels in eight years. Fuel consumption continues to rise, even as retail gasoline prices approach a record $5 per gallon in the US, with the four-week average for motor fuel demand rising to 9 million barrels a day for the first time this year, following the Memorial Day weekend.
Gold was steady around $1 850 an ounce on Thursday, as investors continue to weigh concerns over economic growth against rising Treasury yields, ahead of US consumer price index data that could guide the Fed’s rate hike timeline. The data will be crucial for the path of Fed policy and whether the Central Bank will keep raising interest rates beyond July. Meanwhile, risks to the global economic outlook arising from the war in Ukraine, rising borrowing costs, ongoing supply disruptions, and high commodity prices continue to offer the bullion some support.
ALL EYES ON US JOBS DATA
The dollar index traded around 102.5 on Thursday, remaining in a tight trading range, ahead of key US inflation data. The US consumer price index for May, due out on Friday, is expected to have gained 5.9% on the year, after an annual rise of 6.2% in April, based on consensus forecasts. Markets priced in another 50 basis point rate increases for both June and July, a high inflation reading would bolster expectations of further tightening in the second half of the year.
The euro regained some ground against the greenback, to trade near $1.075 after hitting a session low of $1.069 as investors brace for the kickstart of the ECB tightening cycle.
The British pound neared the $1.26 mark, remaining above a two-year low of $1.216 hit on 13 May, amid a slight increase in investors’ risk appetite. In the UK, the BoE already hiked borrowing costs four times this year, to 1%, the highest level since early 2009. The vote of no confidence initiated against Prime Minister Boris Johnson, coupled with the risk of a recession, is weighing on the pound.
The South African rand continued to gain momentum, trading to a high of R15.16/$ on Thursday afternoon, its highest level since 20 April, on the back of stronger-than-expected first quarter GDP data and positive economic surveys. At the same time, expectations of further tightening by the South African Reserve Bank continues to support the currency.
The rand is trading at R15.44/$ R16.42/€ and R19.32/£.
