Fed officials reaffirm commitment to tackling inflation

Khatija Haque - Head of Research & Chief Economist
Published Date: 18 May 2022


  • Several Fed speakers reinforced the central bank’s commitment to bringing inflation down in comments overnight, with Chairman Powell saying that rates could rise above the neutral level (estimated at 2.5%) and that this may cause “some pain” in the economy with the unemployment rate possibly rising from its current 3.6%. Charles Evans, James Bullard and Neil Kashkari echoed the sentiments, and reinforced the likelihood of at least two more 50bp rate hikes in the upcoming meetings.
  • There is little sign of a softening in the US economy however, with retail sales and industrial production showing strong growth in April. Retail sales were up 0.9% m/m while the March reading was revised higher to 1.4%. Industrial production rose by a faster than expected 1.1% in April on the back of increased motor vehicle and parts output as well as utilities and mining. Improved supply, if maintained, will help to ease inflation pressure while consumer spending is expected to slow in H2 2022.
  • Japan’s GDP contracted by a smaller than expected -1.0% annualised in Q1 2022, with Q4 2021 growth revised lower from 4.6% to 3.8%.  Higher import costs were a drag on net trade, while consumption was lower due to coronavirus restrictions in the first quarter. While the restrictions have eased in Q2, a weaker exchange rate and high energy and commodity prices remains a headwind to growth this quarter as well.
  • Eurozone GDP came in slightly faster than expected in Q1 2022, up 0.3% q/q and 5.1% y/y in the first reading. Employment also rose 0.5% in Q1 as the economy emerged from pandemic restrictions. However the impact of the Ukraine war and higher energy costs have led the European Commission to downgrade their forecast for 2022 growth to 2.7% from 4.0% previously, with downside risks in the event that Russia stops supplying natural gas to western Europe.
  • UK unemployment declined to 3.7% in the three months to March, from 3.8% previously, reflecting a tight labour market. Payrolls increased by a further 121k in April, while the March reading was revised higher to 59k. Despite the rise in payrolls, the level of vacancies reached 1.3mn in the three months to April, a record high. Wage growth picked up slightly to 4.2% in three months to March, well below inflation. However, if bonuses are included, wage growth reached 7%. The data will likely provide some comfort to the Bank of England as it looks to tighten monetary policy further in the coming months.

Today’s Economic Data and Events

10:00 UK CPI (Apr) forecast 2.6% m/m and 9.1% y/y

13:00 EC CPI (Apr) forecast 0.6% m/m and 7.5% y/y

16:30 US housing starts (Apr) forecast 1756k (-2.1% m/m)

Fixed Income

  • US Treasuries fell sharply overnight in response to a return of risk appetite as well as commentary from Federal Reserve chair Jerome Powell that the Fed will “keep pushing” until it sees “clear and convincing” evidence of inflation coming down. Powell’s commentary may open up the way for an even more aggressive path of hiking than using 50bps hike at the next two meetings.
  • The hawkish messages from Powell weighed on the front end of the curve in particular with 2yr UST yields adding 13bps to 2.7003% while the 10yr rose 10bps to 2.9860%. The 2s10s curve bear flattened by around 3bps to less than 28bps.
  • Bear flattening was also the theme across European bond markets as German bonds responded to comments from Klass Knot, governor of the Netherlands central bank, that the ECB could use larger than 25bps hikes to normalize policy. Yields on the 2yr Schatz added almost 24bps to 0.366% while the 10yr bund yield rose around 11bps to 1.044%. In the UK, 2yr gilt yields rose 21bps to 1.4309% while the 10yr yield added 15bps to 1.8786% as employment data came in strong and supportive of further policy tightening from the Bank of England.  


  • Currency markets swung sharply against the dollar as risk sentiment returned and expectations for rate hikes beyond the Federal Reserve increased. EURUSD added more than 1.1% to settle at 1.055, its strongest level since the start of May while GBPUSD rallied more than 1.4% on the back of strong labour market data to 1.2493. USDJPY moved against the yen, adding 0.17% to 129.38.
  • Commodity currencies also extend their recent gains with USDCAD down by 0.3% to 1.2811 while AUDUSD and NZDUSD were by either side of 0.8% each to 0.7029 and 0.6359 respectively.


  • A return in risk-on sentiment boosted global equity markets yesterday, paring some of the severe losses seen over the previous week. In the US the NASDAQ, which has lost the most this year as bets on monetary tightening have risen, picked up 2.8%. The Dow Jones added 1.3% and the S&P 500 2.0%. All three remain down significantly ytd however.
  • There were similar gains earlier in the day in Europe where the composite STOXX 600 closed up 1.2%. The UK’s FTSE 100 was a relative laggard with a 0.7% gain, trailing France’s CAC (1.3%) and Germany’s DAX (1.6%).
  • Locally, the DFM added 1.5% and the ADX 2.9%. Saudi Arabia’s Tadawul closed down -1.7% however.


  • Oil prices eased back overnight, down by 2% in Brent markets to USD 111.93/b while WTI fell 1.58% to USD 112.40/b, actually ending the day at a premium to Brent. The API reported a draw in US crude inventories of 2.4m bbl last week including a drop of more than 3m bbl at Cushing. Gasoline inventories fell by more than 5m bbl. Official data from the EIA will be released later today.
  • ADNOC has announced it will build a new LNG train in Fujairah with capacity of 9.6m tonnes/year compared with existing capacity in Abu Dhabi of 5.8m tonnes/year. The plant is expected to start operation in 2027 and will be linked by pipeline to gas production centres in Abu Dhabi. 

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