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Jamie Jemmeson
January 24, 2022

Could The Sue Grey Report Cause Uncertainty for Sterling?

BoE meeting postponed

Last week amidst all the issues in Westminster inflation in the UK hit 5.4%, for December from 5.1% previously, above expectations of 5.2% and the strongest reading since March 1992. The core rate increased from 4.0% to 4.2%, maintaining pressure on the Bank of England (BoE) to raise interest rates to keep inflation expectations in check. 

This was followed the next day by BoE Governor Bailey’s testimony before the Treasury Select Committee. Bailey stated that the labour market is very tight, there are signs of second-round inflation effects, and that inflation would take longer than expected to decline than had been expected two months ago. Currently, there are concerns that energy prices would not start to decline until the second half of 2023. 

Finally, retail sales disappoint more than expected sinking to 3.7%, much more than expected. Whilst it was disappointing it was not unexpected as given November’s performance (amidst shortage concerns) and the spread of omicron.  

Issues in Westminster continues as the market awaits the release of the Sue Grey report. However, Sterling has been quite resilient so far. 

The week ahead is quieter in terms of economic data with the first reading of the PMI manufacturing and services due for release. This could provide the market with further indications of how the supply chain problems continue to unfold. The market will wait to see if the Sue Grey report is released and if any major revelations could add to PM Johnson’s woes.

Focus On Federal Open Market Committee (FOMC) Meeting For Further Signposting

Last week was a quieter week for the US as it started with a public holiday on Monday. The US Dollar benefited from safe-haven flows amid rising Russia-Ukraine tensions. US President Biden warned over escalating tensions between Russia and Ukraine, however, he doesn’t think at this stage that Russia will launch a full-scale invasion of Ukraine.  

In terms of data releases, US initial jobless claims increased to 286,000 in weekly posting from a revised 231,000 previously and above consensus forecasts of 220,000. The Philadelphia Federal Reserve (Fed) manufacturing index strengthened to 23.2 in January from 15.4 previously and above consensus forecasts of 20.0.  Within the data, shipments and new orders rose sharply, while employment continued to increase, although at a slightly slower pace than forecast. 

Fears of rising global inflation rates continued to influence a risk-off approach across financial markets. 

Looking to the week ahead, the market will focus on the release from the FOMC meeting on Wednesday. No policy changes are expected, but markets will be looking for a signal as to whether it intends to raise interest rates after the meeting in March. A 25bp increase is currently priced in by markets. There has even been some speculation that the Fed will instigate a super hike of 0.50% although such an aggressive move would be uncharacteristic. In terms of data, it is a packed calendar to keep the market busy. Today the PMI services and manufacturing are due, Tuesday has the consumer confidence, Thursday the GDP (growth data) and durable goods and finally on the Friday the Fed’s preferred reading on inflation.

Market to Focus on Data as European Central Bank (ECB) Echo Tepid Approach 

Last week the market continued to watch comments from central bankers on the path of inflation and monetary policy. ECB policymaker, Francois Villeroy de Galhau, stated that the ECB will adapt monetary policy quicker if inflation persists for longer than expected. The current view from several policymakers is that European inflation is expected to ease over the current quarter back below the 2% inflation target set by the central bank. However, the ECB minutes took a more pessimistic view as the ECB meeting minutes were published. These showed a cautious tone over tightening monetary policy too quickly citing the detrimental effect a hike in interest rates will have on recovery and growth. ECB President Christine Lagarde stated that the central bank has “every reason not to act as quickly or as ruthlessly” as the Federal Reserve, its US counterpart, warning that a hike in the Eurozone base rate risks “putting the brakes on growth”. 

Looking to the week ahead the market will continue to decipher the tone of various officials for further clues on what policy could look like moving forward. In terms of data, much of the focus will be on today and tomorrow. Today the PMI services and manufacturing data will focus on economic activity from these sectors. The market will also focus on the German IFO survey to see if it echoes the positive ZEW survey which outperformed expectations.  

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