Will the minutes show the ECB intends to raise rates aggressively as the region is heading into a recession?
· Dax rises despite energy security worries and fears of gas rationing in Germany
· US ADP payroll & jobless claims are expected to show a resilient labour market
· GBP & FTSE rise as Boris Johnson refuses to quit
Wall Street closed higher after the release of the FOMC minutes. The minutes didn’t really tell the market anything it didn’t know heading into the release; that high inflation should be tackled with large rate hikes. Policymakers are prepared to hike rates by a further 75 basis points in the July meeting if needed. The CME Fedwatch tool shows that the possibility of a 75 basis point hike has now risen to 94%, up from 86.7% prior to the release. The USD rose, and Gold fell to a 2022 low of $1730.
Europe points to a firmer open with both the FTSE and the DAX set to rise 1% as investors continue to weigh up the prospect of a recession but also consider that slowing growth could slow central banks’ hiking cycle. Recession concerns have plagued the market for some weeks now, with Europe and the UK in a more vulnerable position than the US.
Energy security
Yesterday European Commission chief Ursula von der Leyen warned that European countries should prepare for the complete cut-off of Russian gas. This comes a week after the German economy minister warned that Germany was moving closer to gas rationing. Given the slowing gas supply and surging energy prices, it’s difficult to see the euro area avoiding a recession.
These concerns have been played out more in the euro than in European indices—Whilst the DAX trades -0.7% across the week. EUR/USD has tumbled over 2%, falling to a low of 1.0160 yesterday, a level that was last seen 20 years ago. The EUR is attempting a modest bounce today, thanks in part to a softer USD, which cools from reaching 107.,60, a 20-year high yesterday.
ECB minutes
Attention will first turn to the minutes from the ECB meeting, which could shed more light on how aggressively the central bank is prepared to raise interest rates to tame inflation. The ECB is starting its hiking cycle as the eurozone economy slows, a point that has unnerved the market. Signs of aggressive tightening could pull the DAX lower.
ADP payroll
In the US session, all eyes will be on the ADP payroll report and initial jobless claims data ahead of tomorrow’s all-important non-farm payroll. Expectations are for ADP private payrolls to rise by 200k in May up from 128k in April. Initial jobless claims are expected to hold steady at around 230k. All in all, the data is expected to show that the US labour market remains strong despite some signs of weakness showing up in other areas of the economy.
UK
Perhaps one area of surprise has been the resilience of the pound and the FTSE, both of which are rising today, despite the political turmoil in Westminster. Boris Johnson still clings to power and will not currently face a new vote of no confidence. This could change next week after the Conservative Party Committee decided to vote for a new executive before deciding on such a move. So far, there have been over 40 government resignations, but defiant Johnson refuses to quit and could call a snap election. This is possibly the last thing the UK economy needs right now.
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