UK inflation stays stubbornly sticky

Inflation in the UK rose more than expected in May, rising by 0.7% m/m compared with market expectations of 0.5%. On an annual basis, headline inflation rose by 8.7% y/y, unchanged from the April level, but faster than the 8.4% that markets had been looking for. Perhaps most worrying for the Bank of England, core inflation rose to 7.1% y/y, its fastest level since 1992. Food and housing inflation slowed in May but a big jump in household costs—home furnishings and durables— along with services generally helped to keep monthly inflation at a hot pace. The Bank of England will set policy today with markets more than 100% pricing in a 25bps hike with rates set to move as high as 6% by the end of the year before rates are held unchanged across at least the first half of 2024.

Fed chair Jerome Powell told the House Financial Services Committee that “nearly all FOMC participants” expect that rates would need to go “somewhat further by the end of the year” but that the speed of tightening policy was “not very important now” and that the pace of Fed hikes would be guided by data. Powell also said there was not apparent plans to change banking capital requirement rules after the collapse of several banks earlier this year.

M3 money supply in the UAE expanded 20.8% y/y in May, from 16.5% in April. This marked the fastest annual growth since February 2009. Meanwhile, CPI inflation in Lebanon was at 260.2% y/y in May, from 268.8% in April. Price growth has been in triple digits since July 2020 as a series of financial and economic shocks and crises have sent the value of the Lebanese pound steadily lower. In Kuwait, inflation was at 3.7% y/y for the second month running.

Today’s Economic Data and Events

• 11:20 ID Bank Indonesia 7-day reverse repo: forecast 5.75%
• 11:30 SZ SNB policy rate: forecast 1.75%
• 15:00 UK Bank of England Bank Rate: forecast 4.75%
• 15:00 TU One-week repo rate: forecast 20%
• 16:30 US initial jobless claims Jun 17: forecast 259k
• 18:00 US existing home sales May: forecast 4.25m
• 18:00 EC consumer confidence June: forecast -17.0
• EG Central Bank of Egypt deposit: forecast 18.25%

Fixed Income

• US Treasuries traded in a choppy session, responding to the hawkish lean from Fed chair in his comments to the House Financial Services Committee. Yields on the 2yr UST rose 3bps to settle at 4.7152% while the 10yr closed the day near unchanged at 3.7189%. European bonds generally closed weaker with gilt yields showing the biggest move as markets responding to the hot inflation print in the UK and edged up their Bank of England rate expectations. Yields on the 10yr gilt close up 7bps at 4.397%. Bund yields also pushed higher, up 3bps at 2.432%.
• South African bonds rallied following a slower than expected inflation print with 10yr yields down 5bps at 11.869% while 10yr Turkey bond yields dropped 30bps to 16.36%.

FX

• The dollar closed weaker against most peers overnight with EURUSD up 0.6% to 1.0986 even as Fed chair Jerome Powell seemed to commit the Fed to higher rates by the end of the year. GBPUSD initially popped higher on the hot inflation print for the UK but then faded the gains to close near flat at 1.277. USDJPY was the standout where the dollar gained with the pair up 0.3% at 141.88.
• Commodity currencies also closed stronger with USDCAD down 0.5% at 1.3164, AUDUSD up 0.2% at 0.6797 while NZDUSD added 0.6% to close at 0.6202.

Equities

• Expectations of further rate hikes in developed markets after the UK’s inflation surprise and Jerome Powell’s testimony weighed on equity markets yesterday. In the US, the rate sensitive NASDAQ dropped 1.2%, while the Dow Jones (0.3%) and the S&P 500 (0.5%) also closed lower.
• The UK’s FTSE 100 ended the day 0.1% lower, the CAC 0.5%, and the DAX 0.6%.
• There was more positivity locally as the DFM closed up 0.2% and the ADX 0.3%. The Tadawul also added 0.3%.

Commodities

• Oil prices gained overnight with the market looking for any positive signals coming out of China. Brent futures rose 1.6% to USD 77.12/b and WTI added 2.9% to close at USD 72.53/b. The API reported a stock draw of 1.2m bbl last week while gasoline stockpiles were higher.