Europe European markets have ended the week very much on a downswing as yesterday’s big sell-off in the US has rippled over into today’s price action, pulling markets into negative territory for the week, with the DAX set to finish lower for the fifth week in a row. The FTSE 100 has also had a disappointing week, sliding to a one week low, with the energy sector saving it from a worse fate with both BP and Shell finishing the week very much on the front foot, after their strong numbers earlier this week. Rate hike talk has dominated this week, with the Fed raising rates by 50bps, with more to come, the Bank of England hiking rates by 25bps, and now several ECB officials have started raising the prospect of following suit in July, in comments made today in response to concerns over higher prices to help anchor future inflation expectations. These comments appear to have accelerated today’s weakness as the economic outlook starts to darken.    Today’s price action has been dominated by weakness in consumer discretionary on concerns over weak demand as higher prices prompt a decline in consumer spending. Travel and leisure have also been caught up in today’s weakness with IAG the worst faller on the FTSE100. The recent updates from US airlines painted a much more optimistic picture for US travel with Delta, United Airlines, and American Airlines saying they expect to return to profit this year, as business travel and leisure travel started to return to more normal levels of activity. Of course, IAG faces slightly different challenges in that its domestic market is more fragmented in the form of its various different brands. Nonetheless, when the airline reported a €2.9bn loss at the end of last year, it said that while it didn’t expect to be profitable in Q1, that it should return to profit from Q2, assuming no further restrictions. Of course, the Russian invasion of Ukraine has put a spanner in the works, various IT issues, which have damaged its brand appeal, along with the various lockdowns and restrictions that have affected its Asia and China routes. Today’s Q1 numbers have seen passenger capacity come in line with expectations at 65%, with an expectation of 80% for Q2, 85% for Q3 and 90% for Q4, with North Atlantic routes expected to be close to full capacity by Q3.   Revenues for Q1 were €3.44bn, slightly above expectations, but below Q4’s €3.5bn, while operating losses narrowed to €754m, which was higher than expected, and appears to be weighing on the share price today, although the airline has maintained it expects to return to operating profit from here on in. The number of passengers carried was 14.38m, above estimates of 14m. On a similar leisure theme Holiday Inn owner IHG has reported revenue per room (RevPAR) rose 61% vs last year and is now back at 82% of 2019 levels. The Greater China region has proven to be a drag in March due to lockdown restrictions. By region, occupancy rates were at 60% in the US, 50% in EMEAA and 36% in Greater China, while the US outlook looks the most promising in terms of increased pricing power, with rates in the US business 4% ahead of 2019 levels. Adidas shares have fallen back sharply after the sportswear company cut its full year operating margins from 10.5% to 9.4%, due to the slowdown seen in its China business. For Q1 operating profit fell 38% year on year to €437m, although this was above expectations while revenue came in at €5.3bn. The company also downgraded its expectations for the rest of the year.  This has prompted weakness in the likes of JD Sports. Dutch lender ING has seen its shares fall back after incurring significant costs on its exposure to Russian loans. The bank said it was taking €987m in loan loss provisions, as it posted a net profit for Q1 of €429m. Revenues came in at €4.6bn, slightly above expectations. US US markets have continued where they left off yesterday, opening lower despite a pretty good non-farm payrolls report, with both the Nasdaq 100 and S&P500 both breaking below key support levels of 12,700 and 4,100 respectively, raising the prospect of further heavy losses in the short to medium term. 428k new jobs were added in April, while the March figure was revised lower to 428k, so a nice bit of symmetry there. The unemployment rate remained steady at 3.6%, while the participation rate unexpectedly fell to 62.2% which is a little surprising. Average hourly earnings remained steady at 5.5% which suggests that for all the concern about a tight labour market and 11.2m vacancies, wage inflation remains subdued. On the earnings front Under Armour has continued the theme of sports apparel makers warning about the outlook, after Adidas warning this morning, by saying that it expects to see a...

Summary United States: 'Til the Medicine Takes The latest economic data suggest supply challenges worsened in April. Delivery times lengthened, and while employers continued to add jobs at a solid pace, the supply of labor weakened. Price pressure has remained elevated as a result. The FOMC raised its federal funds rate 50 bps this week at the conclusion of its policy meeting, and the incoming data for April reinforce our expectation for another 50 bp hike in June. Next week: NFIB Small Business Optimism (Tues), CPI (Wed), U. of Mich. Consumer Sentiment (Fri) International: Reserve Bank of Australia Delivers Initial Rate Hike, BoE & BCB Continue Tightening Faced with concerns about high inflation, multiple central banks around the world tightened monetary policy this week. Notably, the Reserve Bank of Australia (RBA) raised its Cash Rate by 25 bps to 0.35%, citing a resilient economy with inflation that has accelerated faster and higher than previously expected, as well as progress toward full employment and wage growth. The Bank of England and Brazilian Central Bank also delivered rate hikes this week. Next week: Mexico CPI/Banxico Rate Decision (Mon/Thu), U.K. GDP (Thu), Russia CPI (Fri) Interest Rate Watch: The First 50 bps Rate Hike from the FOMC in 22 Years At the conclusion of its meeting this week, the FOMC increased the target range for the federal funds rate by 50 bps to 0.75%-1.00%. The move was widely anticipated by financial market participants, but that does not diminish the fact that it was the first 50 bps rate hike from the Federal Reserve in 22 years. Credit Market Insights: Monetary Policy Is Impacting Mortgages, Including Refinancing Freddie Mac reported on Thursday that 30-year mortgage rates reached 5.27%, 17 bps higher than the previous week and the highest level since 2009. After more than a decade of sub-5.0% mortgage rates, the past few months of expectation setting and quantitative tightening have already affected the mortgage market. Topic of the Week: Shining a Light on the Rising Economic Potential of AAPI Small Business In commemoration of AAPI Heritage Month and Small Business Month, we highlighted some economic contributions of the Asian American and Pacific Islander community with a focus on AAPI-owned small businesses in a recent report. Download the full report

Much has been made of the fact that the western world is experiencing rates of inflation last seen 40 years ago. That’s certainly true of the US, the world’s largest, and most important, economy. There are similarities between the inflation we’re seeing today and that of the 1970s. In both cases oil prices are a major contributor to price pressures. But 1970s inflation was higher than today. It also accelerated over the decade, from around 2% in the 1960s to over 14% by 1980. While energy costs are a factor today, forty years ago a barrel of oil quadrupled in price during the 1973 oil embargo and doubled again in 1979 following the Iranian Revolution. Oil may be over $100 per barrel today, but its rise isn’t a shock like it was back then. We’ve also coped with high oil prices a number of times since the beginning of this century. Selective In the 70s, inflation was everywhere. Today it’s more selective. Some parts of the economy are experiencing rapid price increases (used cars for instance) while others have steady or even falling prices. Much of this has to do with the supply-chain issues, often as a result of pandemic lockdowns, something that central banks can’t control. Prices of goods and services should settle down as we get back to normality. Wages are rising, but this is due to skill shortages rather than unionised workers demanding inflation-busting pay rises. Also, while the US Federal Reserve was caught out by thinking inflation was ‘transitory’, they are finally adjusting rates up. Hopefully, they will do this in a measured fashion to ensure a soft landing. Back then, it took a decade and the appointment of Paul Volker as Fed Chairman before interest rates were pushed high enough to help drive down inflation. There was also a different mindset. The idea of a ‘zero’ let alone a ‘negative interest rate policy’ was unthinkable. As was the prospect of central banks expanding their balance sheets and intervening in the markets by buying up bonds and other financial assets. Back then we had interest rates that were higher than the rate of inflation. That’s something that is unthinkable now. With US CPI inflation around 8.5% year-on-year, and interest rates now at 1.0%, we need the Fed Funds up above inflation just for savers to maintain their purchasing power. Instead, the US currently has a negative interest rate of 7.5% (8.50 minus 1.00). Messed up There’s a growing feeling that the Fed has messed up – again. It has spent years trying to push inflation to its 2% target rate, as measured by Core PCE. Ever since the Great Financial Crisis of 2008/9 they’ve kept monetary stimulus loose. But while the standard measures such as CPI failed to pick up inflationary pressures, hard evidence of rising prices was everywhere. Soaring equity markets, bonds, real estate, artworks, jewellery, classic cars all testified to the fact that money was just too cheap. When they tried to tighten, and it took the Fed from December 2015 to December 2018 to raise rates from 0.25% to 2.50%, stock markets slumped, causing the Fed to reverse course. There was additional monetary stimulus in response to the pandemic. Not only that, but we saw an extraordinarily large dollop of fiscal stimulus too. This turbocharged the US economy coming out of lockdown and finally created inflation. At the beginning, central bankers insisted it was transitory and so had an excuse not to raise rates. Now they have been proved wrong and are being forced to take action. But will it work? Will rate hikes calm the inflation that central bankers and policymakers created in the first place? Is this the right response, or just a public relations exercise in being seen to do something? Is it a desperate attempt to put a lid on inflationary pressures which are already putting a huge strain on households? Inflation is terrible for savers and those on a fixed income. But it also destroys debt, and there’s more debt in the world than there has been in the whole of history. That’s why central bankers could prove to be a lot less hawkish than many analysts currently think. Growth is already slowing. The Fed could have acted sooner, but it missed its opportunity to raise rates modestly and engineer a soft landing. But should they be too aggressive over the next three months or so, they risk crashing the market and causing a recession. That’s why for all the fury and bluster about inflation, central banks may prove to be less proactive than expected when it comes to taking action. 

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the "next couple of meetings". Fed chair Powell communicated that the Fed is not "actively considering" a larger 75bp rate hike although he did not rule it out. We are still just at the beginning of the hiking cycle and we see risks skewed towards more aggressive tightening. Several other central banks also hiked rates this week. Bank of England did 25bp as widely expected but removed the risk of steep rate hikes for now, as the BoE remains concerned about the growth outlook, which translated into a weaker pound. We also got hikes from the Reserve Bank of Australia and surprise 75bp hikes from both the National Bank of Poland and the Czech National Bank. The former was significantly less than priced by markets and the latter was more. This week’s economic data predominantly indicates European resilience to the war in Ukraine so far. Unemployment declined to an all-time low in March and the service sector showed a nice rebound amid reopening in April. On the other hand, the manufacturing sector is slowing down, German industrial orders and output are declining and producer price inflation increased further in March, indicating more headwinds for consumers going forward. We saw high inflation starting to take its toll on Euro area retail sales, which declined in March. Chinese PMI’s plunged in April on the back of the Shanghai lockdown, a warning for the global manufacturing sector, which typically lags China by a few months. On a positive note, the outbreak seems increasingly under control. Next week, we will look out for Russian victory day. We expect Russian president Putin will escalate his rhetoric against the West. The market reaction is uncertain and will depend on the possibility of a Russian attack on other countries. We will also follow discussions on the EU’s sixth sanctions package and if agreement for a Russian oil embargo is found. In the US, April CPI data could very well mark the peak in inflation. We will focus on mom moves, though, which are still too high for the Fed to feel really comfortable. Download The Full Weekly Focus

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the "next couple of meetings". Fed chair Powell communicated that the Fed is not "actively considering" a larger 75bp rate hike although he did not rule it out. We are still just at the beginning of the hiking cycle and we see risks skewed towards more aggressive tightening. Several other central banks also hiked rates this week. Bank of England did 25bp as widely expected but removed the risk of steep rate hikes for now, as the BoE remains concerned about the growth outlook, which translated into a weaker pound. We also got hikes from the Reserve Bank of Australia and surprise 75bp hikes from both the National Bank of Poland and the Czech National Bank. The former was significantly less than priced by markets and the latter was more. This week’s economic data predominantly indicates European resilience to the war in Ukraine so far. Unemployment declined to an all-time low in March and the service sector showed a nice rebound amid reopening in April. On the other hand, the manufacturing sector is slowing down, German industrial orders and output are declining and producer price inflation increased further in March, indicating more headwinds for consumers going forward. We saw high inflation starting to take its toll on Euro area retail sales, which declined in March. Chinese PMI’s plunged in April on the back of the Shanghai lockdown, a warning for the global manufacturing sector, which typically lags China by a few months. On a positive note, the outbreak seems increasingly under control. Next week, we will look out for Russian victory day. We expect Russian president Putin will escalate his rhetoric against the West. The market reaction is uncertain and will depend on the possibility of a Russian attack on other countries. We will also follow discussions on the EU’s sixth sanctions package and if agreement for a Russian oil embargo is found. In the US, April CPI data could very well mark the peak in inflation. We will focus on mom moves, though, which are still too high for the Fed to feel really comfortable. Download The Full Weekly Focus

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the "next couple of meetings". Fed chair Powell communicated that the Fed is not "actively considering" a larger 75bp rate hike although he did not rule it out. We are still just at the beginning of the hiking cycle and we see risks skewed towards more aggressive tightening. Several other central banks also hiked rates this week. Bank of England did 25bp as widely expected but removed the risk of steep rate hikes for now, as the BoE remains concerned about the growth outlook, which translated into a weaker pound. We also got hikes from the Reserve Bank of Australia and surprise 75bp hikes from both the National Bank of Poland and the Czech National Bank. The former was significantly less than priced by markets and the latter was more. This week’s economic data predominantly indicates European resilience to the war in Ukraine so far. Unemployment declined to an all-time low in March and the service sector showed a nice rebound amid reopening in April. On the other hand, the manufacturing sector is slowing down, German industrial orders and output are declining and producer price inflation increased further in March, indicating more headwinds for consumers going forward. We saw high inflation starting to take its toll on Euro area retail sales, which declined in March. Chinese PMI’s plunged in April on the back of the Shanghai lockdown, a warning for the global manufacturing sector, which typically lags China by a few months. On a positive note, the outbreak seems increasingly under control. Next week, we will look out for Russian victory day. We expect Russian president Putin will escalate his rhetoric against the West. The market reaction is uncertain and will depend on the possibility of a Russian attack on other countries. We will also follow discussions on the EU’s sixth sanctions package and if agreement for a Russian oil embargo is found. In the US, April CPI data could very well mark the peak in inflation. We will focus on mom moves, though, which are still too high for the Fed to feel really comfortable. Download The Full Weekly Focus