A Russian Surprise

RUSSIA Russia’s Central Bank has cut interest rates at its off-schedule meeting held this morning | The Bank of Russia lowered its benchmark rate by 300 basis points to 11%, beating the expectation of a 2% cut | The central bank noted that ‘it holds open the prospect of a key rate reduction at its upcoming meeting’, as it attempts to stop a recent rally in the Ruble and wind down the economic defences put in place since the invasion of Ukraine

OVERNIGHT Asian equity markets are mixed this morning following the release last night of the minutes of the Fed’s May policy meeting. Chinese stocks initially fell after downbeat comments on the economy by Premier Li, while the Bank of Korea raised interest rates by 25bp to 1.75%, as expected. The Fed minutes reaffirmed Chair Powell’s signal that policy rates are likely to rise by 50bp in the next two meetings in June and July. That would leave the Fed "well positioned later this year to assess the effects of policy firming” which points to the possibility of a pause or slower pace of tightening. At the same time, the Fed left the door open to raise rates above neutral, if needed, to tame inflation. THE DAY AHEAD

The UK economic calendar is again bereft of major data releases today. Yesterday, the CBI released a downbeat quarterly service sector survey which suggests that demand and profits remain under pressure, although firms are rebuilding margins by raising their prices. Meanwhile, media reports suggest that Chancellor Sunak will announce measures to reduce energy bills this winter as part of a package worth £10bn which is expected to be largely paid for by a windfall tax on oil and gas companies. Ofgem announced earlier this week that it expects the energy price cap to rise by ~40% in October, which would increase the average household bill to around £2,800. In the US, the second estimate of Q1 GDP will probably confirm the advance estimate of a 1.4% quarterly annualised contraction which was driven by growth in imports and a slower build-up of inventories. Final demand was stronger which should see growth return in Q2. Today’s other US data will provide further indications on the strength of the labour market and the housing market. We expect the weekly jobless claims data to reaffirm a tight labour market. However, higher interest rates are expected to contribute to a sixth straight fall in pending home sales. A regional manufacturing survey from the Kansas City Fed will also be released and is expected to show a fall in the composite index.

MARKETS

Sterling has received moderate support in recent sessions, possibly on tentative signs of an improved risk tone in the markets. GBPUSD briefly topped 1.26 overnight, while GBPEUR has risen towards 1.18. US 10-year Treasury yields fluctuated around 2.75%.

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