European natural gas prices have eased over the last three days signalling some ease in concerns about the threat of Russia cutting off gas supplies to Germany. We wait to see if the Nord Stream 1 pipeline reopens on Thursday and allay fears of an energy crisis in Europe.
Minutes from the Reserve Bank of Australia revealed a slightly hawkish tone from the Bank. The minutes revealed that the size and timing would be dictated by economic data. RBA deputy governor Michele Bullock commented that the neutral rate was higher than the current level and that households were in a fairly good position to deal with higher interest rates. The Australian dollar strengthened off the back of the data.
Sterling was spurred on yesterday in light of increased risk appetite in the markets as a follow on from Friday’s report from the US suggesting that inflation expectations are easing. European and US stock indices all finished higher with the dollar continuing to lose ground. Departing BoE member Michael Saunders spoke yesterday commenting that he feels the Bank’s tightening cycle may still have some way to go and that any major tax cuts bought in by the new Tory leader would mean higher rates.
Today’s job report has shown that the unemployment rate remained at 3.8% in the three months leading up to May. Wage growth including bonuses dropped in May to 6.2% from 6.8% and wages growth excluding bonuses rose marginally to 4.3%. The report also revealed that brits re-joined the job market at the fastest pace since before the pandemic. Based on the release, it seems that data won’t change the minds and opinions at the Bank of England with money markets keeping up the bets for a 0.5% rate hike in the August meeting and as a result, the impact on the pound has been minimal.
On the political front, Tom Tugendhat has dropped out of the race for the Tory leadership with Rishi Sunak still leading the votes. Another round of voting will happen today. Governor Bailey will be speaking later in the afternoon and the next domestic data will be tomorrow’s inflation data.
The euro was helped yesterday by some positive news flows over the course of the session concerning the potential gas crisis and the recent Italian political crisis.
Demand for European natural gas seems to have calmed over the last three days, signalling some progress in the return of the Nord Stream 1 pipeline on Thursday after a turbine for the pipeline was flown into Germany from Canada on Sunday. Other headlines that caught the eye were that Algeria has come to an agreement to supply gas into Italy, Egypt are ready to play a role in easing a potential European gas crisis and France and the UAE have signed a deal on energy cooperation. We await further news from the EU on Wednesday on what contingencies they have should Russia cut off or even reduce gas supplies into Europe.
Over in Italy, a group of deputies in the Five Star Movement, who boycotted a confidence vote last week, are ready to turn their back on Five Star leader Giuseppe Conte and show support for Mario Draghi’s coalition. Whether that is enough to dissuade Mario Draghi from resigning is another question ahead of a confidence vote on Wednesday. Earlier in the day yields on Italian bonds peaked back up to the highs of last week but then later eased off suggesting that the potential for a fallout in the government may have eased off. We wait for Wednesday to see if Draghi stays or goes and whether a snap election is called.
A Reuters report this morning has suggested that the ECB officials will be discussing a 0.5% rate hike on a worsening inflation backdrop. Money market bets increased to a 40% chance of such a hike for this Thursday and the euro has strengthened off the back of the report. The importance of Thursday for the euro has intensified further.
In focus today will be inflation data from the eurozone – expected to remain at 0.8% month on month in June.
As mentioned above the dollar continued to lose ground as expectations that inflation could be easing, and comments made by Fed members to rule out a 1% rate hike increased risk appetite. Data wise from the US, the NAHB housing market index fell from 67 to 55 – one of the data points considered to be key for Fed member Waller. Housing starts, tracking how many new homes or buildings were constructed, will be the only data point from the US today.
Equals Morning Report- 19th July 2022
Today’s Interbank Rates at 8:52 am against sterling movement.
GBP>EUR – 1.1737
GBP>USD – 1.2001
EUR>USD – 1.0232
GBP>CAD – 1.5539
GBP>AUD – 1.7455
GBP>SEK – 12.326
GBP>AED – 4.4062
GBP>HKD – 9.4190
GBP>ZAR – 20.458
GBP>CHF – 1.1642
· EUR ECB Bank Lending Survey
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