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Jamie Jemmeson
May 25, 2022

Recession fears grow

European Central Bank expects a technical recession

Sterling fell to its lowest level in a week against the single currency as the Purchasing Managers’ Index (PMI) data reinforced concerns that the UK could fall into recession later in the year. Concerns were already elevated following the negative growth seen in March’s GDP figures. The composite PMI, which includes services and manufacturing fell to 51.8 in May from 57.6 in April, its lowest level since February last year. The market is currently fully pricing in a 25 basis point rate rise from the Bank of England (BoE) at the June meeting and 116 basis points of tightening by the end of the year, down from around 125 basis points on Friday after strong retail sales data. However, if we continue to see this trend continue, it could result in a further tapering of expectations which could ultimately hurt Sterling. The calendar for the rest of the week is fairly quiet. BuE MPC Member Silvana Tenreyro is due to speak as part of a panel discussion at a conference hosted by Bocconi University, in Milan; given the uncertainty of the path of interest rates given the recent downturn in the economy, the market will look for clues regarding future policy action.

Euro on the front foot following Hawkish ECB comments

The single currency has strengthened in recent days despite some mixed data. The Euro-zone PMI manufacturing index retreated to an 18-month low and slightly below expectations while the services-sector index was also below expectations at a 2-month low. However, it was the rhetoric from various officials that have provided the single currency a boost. European Central Bank (ECB) President Lagarde stated that markets should not translate words into percentage point moves, but also commented that the bank is attentive to the level of the Euro. Elements of the markets are interrupting this as signposting to use potential rate hikes to strengthen the currency to reduce the impact of importing inflation. ECB policymaker Martins Kazaks said on Tuesday that the bank should not rule out a 50-basis point rate hike, and that he sees possible rate hikes in July, September and potentially one more in Q4 of 2022. His remarks come after fellow ECB policymaker Holzmann called for a 50-basis point hike in July and commented that is it important for the ECB to end this year with rates in positive territory but fellow member Villeroy stated that this was not part of the consensus; however this is the second member to suggest the possibility. The rest of the week is fairly quiet for the region but ECB President Lagarde rhetoric will be closely monitored for clues on policy as she speaks today.

Services Sector slowdown weighs on the Dollar

The US Dollar faced increased selling pressure on Tuesday following the release of weaker than expected US Services PMI data for May. The S&P Global flash estimate for the Services sector came in at 53.5, below expectations for a reading of 55.2 and below last month’s reading of 55.6. The pace of expansion was reportedly weighed down by hikes in selling prices and concerns over higher interest rates. The Dollar faced further pressure later during the afternoon on Tuesday as it was reported that New Home Sales reportedly sank 16.6% month-on-month to a seasonally adjusted annual rate of 591,000 in April. The weaker than expected reading comes after a 10.5% slump in March, reflecting the ongoing impact of the recent sharp rise in mortgage rates. The New Homes Sales figure was reported at 591K over the past 12 months to April, the lowest since April 2020 and well below forecasts of 750,000 well below expectations for 750K and down from March’s 709K reading.

Looking ahead to the reminder of this week, markets attention will turn to the release of durable goods orders for April and the release of the FOMC Minutes report from the Fed’s May meeting, when it was announced that interest rates were raised by 50-basis points. Investors will look for fresh clues regarding policymakers expected timing and pace of hikes to come with a 50-basis point hike in rates expected at the next two meetings in June and July.

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