Unsurprisingly, inflation continues to be the topic of the moment with figures announced Wednesday showing US prices rising 9.1% in June compared to a year ago, the highest rate in 40 years. Wednesday’s result was surprisingly higher than consensus estimates of 8.8%. Inflation continued to be led by large food and fuel price increases but services inflation was also up 5.5% on the year, a concerning sign.
Aggressive action from the US Federal Reserve next month is expected with markets pricing an interest rate rise as large as 100 basis points, up from prior predictions of another 75 point rise. Strong jobs data last Friday that defied expectations of a slowdown will empower the Fed to act as unemployment remains low at 3.6%. Nonetheless, the chances of a ‘soft landing’ for the US economy continue to diminish.
News of interest rate rises in the US will do nothing to help the Euro, which received another big hit this week. The Euro briefly hit dollar parity on Wednesday before recovering to around $1.0028. A 12% fall against the dollar in 2022 demonstrates the fear of recession on both sides of the Atlantic and Europe’s greater exposure to the war in Ukraine.
The euro is not particularly weak when compared to other major currencies, down only 3.6% this year, but a rapidly strengthening dollar has driven it to new lows. In a rare piece of good news for the Eurozone, Croatia has now received final approval to join the Euro (and replace the Kuna) from January 2023 as the zone’s 20th member.
In the UK, Bank of England Governor Andrew Bailey pledged to bring down inflation to the 2% target in a speech given on Tuesday. Bailey’s hawkish comments now have markets predicting a 60% chance of a 50 basis point rise in interest rates at the August meeting.
Better than expected UK GDP data was released on Wednesday as the British economy expanded by 0.5% in May. Avoiding an official recession after April’s contraction is seen as a sign that the economy is surviving (despite high inflation) and that the Bank of England can continue to raise rates to tackle rising prices.
In politics, the Tory leadership race is in full swing with Rishi Sunak, Liz Truss and Penny Mordaunt considered leading contenders. Tax cuts are becoming a key issue in the race as the need for economic growth is balanced with a recent report from the independent fiscal watchdog describing public finances as ‘on an unsustainable path’. The candidates will be whittled down to the final two by the 21st July.
Around the rest of the world, Canada lifted interest rates by 100 bps and New Zealand raised by 50bps for the third consecutive time. Growing inflation continues to be a risk and central bankers believe front-loading the interest rate cycle may be the key to a softer landing.
To finish on a lighter note, a new Vincent Van Gogh self-portrait has been uncovered. An X-ray of his famous work, Head of a Peasant Woman, showed that the canvas had been used twice, a technique often used by Van Gogh to save money.
