The End of Cheap Money

OVERNIGHT

Asian equity markets are mostly lower this morning. Brent crude oil has risen towards $124 a barrel, adding to inflation concerns, and US 10-year Treasury yields have edged further above 3%. There were also reports Shanghai is introducing lockdown restrictions in some districts for mass Covid testing. That offset better data on China’s trade flows. The OECD yesterday downgraded its global GDP growth forecast for this year to 3.0% from 4.5% and sees it moderating further to 2.8% in 2023. It predicted UK growth of 3.6% this year before stagnating in 2023.

THE DAY AHEAD

Today’s focus is the policy update from the European Central Bank. The policy decision will be announced at 12:45BST, followed by the press conference with President Lagarde from 13:30BST. Although interest rates are expected to be left unchanged, markets will be watching for confirmation of an imminent end to net asset purchases under its QE programme. That would pave the way for interest rate lift-off at the next meeting on 21 July. ECB President Lagarde has indicated that 25bp hikes are on the table for both July and September, which would bring the deposit rate out of negative territory from the current -0.5% to 0%. President Lagarde has played down prospects of a larger 50bp increase in one go, although there is pressure from some rate-setters to move more quickly. There is also speculation that the ECB will also announce measures to counter the risk of wider peripheral bond yield spreads within the Eurozone as QE ends and interest rates start to rise. A reassessment of the inflation outlook will be provided in the ECB’s new macroeconomic projections. Eurozone inflation has continued to surprise on the upside, with the latest May reading at 8.1% for headline CPI, while even core inflation (excluding food and energy) is well above target at 3.8% reflecting strong price rises for services and non-energy industrial goods. Overnight, the UK RICS survey’s house price balance eased to 73% in May from 80% in April. The organisation said that new buyer enquiries fell but constrained supply will continue to support house prices. Later today, PM Johnson is expected to give a speech that will include housing market reform, including extending right to buy to people renting from housing associations. Elsewhere, US weekly jobless claims are expected to reaffirm a tight labour market. We predict initial claims to have edged just below 200k and to remain not too far above March lows. China will release CPI and PPI inflation data early Friday.

MARKETS

Ahead of today’s ECB policy update, the euro is broadly steady against the US dollar, remaining just above 1.07. Sterling is slightly weaker against both the greenback and the euro.

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