Markets have had a strong to start to the week. Sentiment was helped after Biden spoke early in the week to reiterate that a US recession isn’t inevitable, quoting the country’s low unemployment as a reason to be optimistic.
CPI – a prominent measure of inflation – was released in the UK this morning, edging up slightly from last month at 9.1% for May (versus 9% for April). An increase in the measure was forecast, as we expect inflation to peak later in the year, and then fall back towards targets over 2023.
One of the drivers behind above target inflation for May has been food prices. We’ve seen an increase in many agricultural commodity prices this year, with Ukrainian farmers struggling to export their harvest following the invasion of Ukraine. This week, we saw many agricultural commodity prices fall slightly, such as corn, rapeseed oil, soybeans and wheat (wheat prices dropped to an 11-week low). This comes as analysts have upwardly revised their expectations for production, given favourable weather from many key growers.
This is good news for food prices over the short-term. As we have said previously, a large proportion of the inflationary pressures are short-term, and we are now starting to see some of the early signs of easing.
In China, a COVID-19 case has sparked neighbourhood lockdowns in Shenzhen. Whilst there are still broad lockdowns in Macau, all in all, China appears to be coming out of large-scale lockdowns, given that new cases have caused pockets of lockdowns (rather than full-scale city lockdowns). China is reporting the lowest number of new cases since February.
Due to this, the People’s Bank of China didn’t feel the need to make any changes to their loan prime rates (their main lending rates) on Monday.
On Thursday, we will see the results of the Federal Open Market Committee’s 2022 stress tests, whereby the largest US banks are put through a hypothetical surge in unemployment and a crash in commercial real estate. This can be likened to a health check for banks. The process will dictate how much each bank should hold as a capital buffer, and therefore how much they are able to return to investors through means such as dividends and/or share buy backs.
Later in the week – some of the items we will be looking out for include Japanese CPI, UK retail sales, Eurozone consumer confidence and the ECB economic bulletin.
Hannah Owen, Portfolio Specialist