All Eyes on German IFO

OVERNIGHT

Equity indices are mostly trading higher across the Asia Pacific, albeit stocks in China and Hong Kong continued to fall as record numbers of new Covid cases in Beijing raised concerns of a broad lockdown across the capital, in adherence with China’s stringent Covid policy. US equity futures are also trading higher, although this follows seven weeks of decline and overall equity sentiment remains soft.

THE DAY AHEAD

There are still a few weeks to go before the next set of announcements from the European Central Bank (9th June), US Federal Reserve (14th June) and BoE (15th June). In the meantime, comments from policymakers will continue to be examined closely for clues on their intentions. The US Fed’s message is clearest with its policymakers united in indicating that for now they are more concerned about inflation and that, as result, 50 basis point increases in interest rates are likely in both June and July. However, with the recent fall in equities generating some of the required tightening in financial conditions that the central bank is trying to achieve by raising interest rates, there are questions of whether some Fed members may start to point to the need for a lower peak in interest rates. Later today, Fed members Bostic and George are scheduled to speak and any indication of a wavering in hiking intentions will be closely watched for. Recent ECB comments indicate that an increasing number of policymakers and, possibly a majority, now favour or are open to an interest rate hike at the 21st July policy update despite ongoing economic uncertainties. Minutes of their April meeting released last week noted that several policymakers were ready to move rates at that point. But that obviously was not true of the majority and the consensus now seems to be building around using the June update to signal a July move. A number of ECB officials are due to speak over the course of the day, including De Cos, Nagel, Holzmann and Villeroy. The last two will be speaking about “The Return of Inflation” at an event in Vienna, alongside BoE Governor Bailey. Data wise, today’s German IFO survey for May will provide an update on economic trends. Since the war in Ukraine started, the index has fallen below its long-term average, and we expected a further modest fall this month. Early tomorrow morning, monthly UK public finance data for April will be released. While the figures are the first for the new fiscal year (2022/23), they will be watched for indications of the leeway for the government to offer extra support to households. As concerns about the ‘cost of living squeeze’ have intensified, there have been growing calls for action and recent media reports have suggested a package may be introduced before the parliamentary recess in July. Potential measures that have been talked about include further specific support for fuel bills and a temporary cut to VAT.

MARKETS

The mild improvement in sentiment has seen the US dollar ease further away from its recent highs. This has pushed GBP/USD to a two-week high above 1.2550 and somewhat above the recent low around 1.22

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