Bank of England hikes by 50bps

The Bank of England hiked rates by 50bps to bring the Bank Rate to 5% with seven members of the MPC voting for the hike and two voting to keep rates unchanged. The hike follows on from a hotter than expected inflation print in the UK for May with headline CPI rising by 8.7% y/y. The BoE noted that inflation remains higher than expected across services and core goods but expects headline inflation to fall thanks to a drop in core goods inflation even if services prices are expected to remain high. The BoE also said that “second-round effects” in prices are taking longer to come down than they did to emerge and that the impact of rate hikes will take time to have an impact on mortgage costs. The prospect of further tightening from the Bank of England looks high as the inflation picture remains stark for the UK with market expectations of rates getting to as high as 6% by the end of the year. We expect at least another 50bps of tightening spread over the upcoming meetings taking the Bank Rate to 5.5% where it will be held until the end of the year and into 2024.

The Turkish central bank hiked its benchmark one-week repo rate by 650bps to 15.0% at its first post-election meeting yesterday. This appears to mark an end to the unorthodox cuts or holds of the preceding meetings, and the statement said that the committee had ‘decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior’. While the magnitude of the hike was at the lower end of estimates ahead of the meeting, the bank pledged that ‘Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.’ Previous lines about keeping ‘financial conditions supportive to preserve the growth momentum’ were removed from the statement.

In Egypt, the CBE kept the benchmark overnight deposit rate unchanged at 18.25%, as expected. The bank noted that incoming data since the May meeting (where rates were also held) had been in line with expectations, and so it opted to keep rates where they were in order to assess the impact of previous tightening.

Fed chair Jerome Powell said it would be “appropriate to raise rates again this year, and perhaps twice” in comments to the Senate Banking Committee. The comments will firm up market expectations that the Fed will indeed hike in July and likely once again later in the year even if signs of an economic slowdown become more pronounced. Janet Yellen, the secretary of the treasury, said the “odds of [a recession], if anything have gone down” but also acknowledged that a slowdown in activity was necessary to get inflation lower. Also in the US, initial jobless claims were unchanged at 264k in the week of June 17 while continuing claims fell by 13k to 1.76m.

Inflation in Japan decelerated in May to 3.2% y/y when stripping out food prices. Markets had been looking for a slightly slower print while an inflation measure that strips out energy costs rose by 4.3% y/y, its highest level since 1981. The Bank of Japan has been reluctant to change its policy stance as unlikely many markets, it had been actively trying to get inflation higher over the last several decades.

The UAE’s central bank forecasts GDP growth of 3.3% this year, a cut of 0.6 percentage points from its prior forecast. The CBUAE noted the “moderation in the oil segment of the economy” as the UAE participates in OPEC+ cuts. For 2024 the CBUAE projects growth of 4.3%, unchanged from its prior forecasts. For the government’s balance sheet, the central bank estimated a fiscal surplus of 10.5% in 2022, up from 4.5% in 2021.

Today’s Economic Data and Events

• 10:00 UK retail sales May m/m: forecast -0.2%
• 11:00 TU trade balance May: forecast -USD 12.7bn
• 11:15 FR HCOB composite PMI June: forecast 51
• 11:30 GE HCOB composite PMI June: forecast 53.3
• 12:00 EC UCOB composite PMI June: forecast 52.5
• 12:30 UK S&P Global composite PMI June: forecast 53.6
• 17:45 US S&P Global composite PMI June: forecast 53.5

Fixed Income

• US Treasuries eventually pulled weaker by the end of the day with yields on the 2yr UST up about 8bps at 4.7909% while the 10yr rose about the same amount to 3.7946%. Hawkish commentary from Fed chair Jerome Powell at the Senate will firm up hike expectations with markets pricing in about a 75% chance of a 25bps hike in July.
• Gilt yields closed mixed following the Bank of England’s surprise 50bps hike. Yields on the 2yr rose 2bps to 5.045% while the 10yr closed stronger with yields down about 4bps at 4.359%. Markets look to be pricing another 100bps of tightening by the end of the year to take the policy rate to 6%.

FX

• The dollar pulled higher against most peers as the prospect of further tightening from central banks seemed to have spooked markets. EURUSD closed lower by 0.3% at 1.0956 while GBPUSD shrugged off the Bank of England’s hawkish move and dropped 0.2% at 1.2748. USDJPY added 0.9% overnight to settle at 143.11, its weakest level since November last year.
• USDCAD was the standout among commodity currencies with the loonie rallying against the dollar. USDCAD closed lower by 0.1% at 1.3151. AUDUSD fell 0.6% to 0.6756 while NZDUSD dropped 0.4% to 0.6178.

Equities

• It was a mixed bag for equity markets yesterday. In the US, the Dow Jones closed flat while the S&P 500 added 0.4% and the NASDAQ 1.0%. In Europe, however, the key indices all closed lower. The FTSE 100 lost 0.8% as the BoE surprised to the upside, while the CAC also lost 0.8%.
• In Turkey, the Borsa Istanbul reacted positively to the rate hike by the TCMB as it ended the day 4.7% higher. Locally, the DFM lost 0.2% but the ADX closed 0.4% higher. The Tadawul dropped 0.1%.

Commodities

• Oil prices dropped overnight with Brent down 3.9% at USD 74.14/b and WTI sinking 4.2% at USD 69.51/b. hawkish central banks that could tip economies into recession are weighing on commodity prices. Commercial crude stocks in the US fell by 3.8m bbl last week while there were modest builds in gasoline and distillate stockpiles. Production fell by 200k b/d to 12.2m b/d.