UK inflation soars in April

Khatija Haque - Head of Research & Chief Economist
Published Date: 19 May 2022

 

  • UK inflation soared to 40-year high of 9.0% y/y in April from 7.0% in March, broadly in line with consensus forecasts. Consumer prices rose 2.6% m/m on the back of a 48.6% monthly rise in fuel and electricity. Food prices rose 1.5% m/m, airfares & travel costs were up 6.7% m/m and household services increased 2.1% m/m. The Bank of England expects inflation to peak at 10% y/y in the coming months, and is expected to push ahead with raising interest rates to at least 2% by the end of this year.
  • In the Eurozone, inflation was revised slightly lower from the flash estimate to a still-high 7.4% y/y, a joint record high with March. Core inflation was at a record high of 3.5% y/y, and an ECB rate hike in July looks likely, with the Dutch central bank governor Klaas Knot suggesting a 50bp hike should be on the table in July.
  • US housing starts came in lower than forecast in April, with the March reading revised sharply lower as well. However the main driver of the stock market rout overnight was another retail earnings miss; Target confirmed higher costs were eroding margins and indicated lower expected profits going forward.  Other large retail companies including Walmart and Amazon have faced similar pressures and indicated that consumers appeared to be shifting from discretionary spending to lower-margin essential items as inflation erodes purchasing power. Separately, the lockdowns in China have led to increased supplier delivery times in the US for the first time this year, according to the New York Fed.   
  • Fed speakers Charles Evans and Patrick Harker both indicated that the Fed would need to raise rates to above the neutral level in order to curb inflation, and that the economy would be able to withstand “measured” tightening.
  • F&B firm Agthia said it would seek an exemption from India for the UAE to continue to import wheat after India recently announced a ban on wheat exports.  

Today’s Economic Data and Events

16:30 US initial jobless claims (14 May) forecast 200k

18:00 US existing home sales (Apr) forecast 5.65mn (-2.2% m/m)

18:00 US leading index (Apr) forecast 0.0%

Fixed Income

  • Risk appetite crumbled overnight in response to negative corporate results that highlighted the impact inflation was having on the US and global economies. US Treasuries rallied as risk havens with yields on the 2yr UST down 3bps at 2.6694% while the 10yr yields fell 10bps to 2.8840%. Treasury markets will continue to be buttressed and buffeted by serving as a risk haven as well as responding to hawkish commentary from Fed officials.
  • European bonds were generally stronger although didn’t rally as much as US Treasuries. Yields on the 10yr gilt fell almost 2bps to 1.861% while the 10yr bund yield closed at 1.025%, down around 2bps. Emerging markets were mixed though negative moves were relatively contained. Yields on South African 10yr bonds held steady at 10.375% ahead of today’s SARB meeting while Turkish 10yr bonds rallied with yields lower by 10bps to 23.32%.   

FX

  • Most currencies started the day either stronger or at least stable against the US dollar but as the US equity session opened, selling pressure increased and pushed the dollar up against peers. The broad DXY index added 0.4% to 103.81, helped by a 0.8% decline in EURUSD to 1.0464 while GBPUSD fell sharply in its second day of wide moves, down 1.2% to 1.2341. USDJPY fell back by 0.9% to 128.23, acting as seemingly a conventional safe haven.
  • Commodity currencies also wrenched lower in line with the downward move in risk assets. USDCAD settled at 1.2890, up 0.6% in favour of the USD, while AUDUSD dropped 1% to 0.6955 and NZDUSD fell 0.9% to 0.6297.

Equities

  • The meltdown in equity markets restarted yesterday after some brief respite, as some disappointing corporate results and heightening recession fears came to the fore. US stocks had their worst day since June 2020, as the NASDAQ led the losses with a drop of -4.7%. There were sizeable losses on the Dow Jones (-3.6%) and the S&P 500 (-4.0%) also.
  • There had been a similar story in Europe earlier in the day, albeit not to quite the same degree. The FTSE 100 lost -1.1%, the CAC -1.2% and the DAX -1.3%. In Asia at the start of the day the Shanghai Composite lost -0.3% but the Nikkei managed to close 0.9% higher. Asian markets are following the lead from the US and are red across the board this morning however, with those two key indices trading down -1.0% and -2.5% respectively so far.
  • Locally, the DFM lost -0.9% yesterday but the ADX (1.4%) and the Tadawul (0.2%) managed to close higher.

Commodities

  • Oil prices fell a second day running with Brent down by 2.5% to USD 109.11/b and WTI falling by 2.5% to USD 109.59/b. the broad negative move in risk assets caught commodities as well even as supply risks remain elevated.
  • Commercial crude inventories in the US dropped by 3.3m bbl last week while SPR inventories were drained by around 5m bbl. Gasoline stocks also fell substantially, down by almost 5m bbl last week while distillate stocks rose. US oil production added another 100k b/d to 11.9m b/d, barely showing any change since the start of the year.  

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