UK Inflation Surges Whilst Johnson and Sunak Are Fined

Yesterday the UK labour market data recorded a slight decline in unemployment to 3.8% from 3.9%. However, the average earnings increase at 4% still is well shy of the inflationary figures and piles further pressure on the Government to act. The gap between inflation and earnings sees the biggest fall in living standards in 8 years. Sterling was hampered to some extent by underlying reservations over the Brexit impact with Office of National Statistics (ONS) data indicating that the number of UK companies exporting to the EU declined by over 30% in 2021, but also due to the risk-off trend that is evident due to the ongoing war in Ukraine.

News that Prime Minister Johnson and Chancellor Sunak had been fined for a lockdown breach did not have a significant impact, but markets will be monitoring developments closely; especially with the local elections coming up.

This morning, the headline UK inflation rate surged to a 30-year high of 7.0% for March from 6.2% previously and above consensus forecasts of 6.7%. The market will keep a close eye on Bank of England (BoE) members’ rhetoric moving forward for signposting on the path of interest rates.

Core US Inflation Falls Below Expectations

The highlight economic data release on Tuesday announced that US Core CPI rose less than analysts had forecasted in March, suggesting that the Federal Reserve (Fed) might not need to adopt the level of urgency to raise interest rates as analysts have been pricing in. US Core CPI, which excludes food and energy prices, rose by just 0.3%, below the 0.5% expectations and the smallest increase since September.

The headline CPI figure was announced at 8.5%. The initial market reaction to the announcement saw the US Dollar fall, before bouncing back later in the session after Fed member Brainard’s hawkish comments overshadowed the inflation figures later in the session. The Fed’s deputy commented that despite the welcoming signs of cooling inflation from the March data, the Central Bank was still determined to substantially reduce its balance sheet and raise rates several times this year. Brainard’s comments appeared to reaffirm the Fed’s Minutes report with markets continuing to price in a 50-basis point hike in May.

Looking ahead to today it’s a quiet US economic calendar with no significant data releases scheduled as markets attention will turn to tomorrow’s release of Retail Sales data for March.

EU Business confidence fades as peace talks at a dead end

The German ZEW economic confidence index edged lower to -41.0 for April from -39.3 previously, but above consensus forecasts of -48.0. There was no Euro support from Ukraine developments with very strong expectations that there would be a major Russian offensive on the Donbas. Russian President Putin stated that peace talks with Ukraine were at a dead-end, highlighting the likelihood of a prolonged conflict is the story that the Biden administration is preparing a military assistance package of roughly $750m.

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