The noise
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The UK’s headline inflation rate fell in April, dropping from 10.1% in March to 8.7%. Despite appearing to be a considerable step in the right direction towards the Bank of England’s 2% inflation target, the figure has come in noticeably higher than markets were expecting (8.2%). Core inflation (excluding food and energy) rose quite substantially, markets expected it to remain at 6.2%, but instead jumped to 6.8%. Money markets priced in a terminal interest rate of around 5.5% on Wednesday following the inflation release, 0.4% higher compared to a day earlier. The latest inflation data emphasises a need for tighter policy by the Bank of England and will encourage further rate hikes through the summer.
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Tensions surrounding the US debt-limit negotiations reached a new level as Fitch Ratings warned that the US’s AAA rating was under threat by the political standoff that has thus far prevented a deal. House Speaker Kevin McCarthy is optimistic that negotiators will reach a deal prior to 1 June, the date by which Treasury Secretary Janet Yellen warned the US could run out of cash.
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China’s central bank looks likely to cut the reserve requirement ratio for major banks earlier than anticipated, as the economic recovery post-stringent Covid rules loses steam. This comes as economists revise downwards their estimates for Chinese growth for the year.
The numbers
The nuance
Headline UK inflation is showing increasing signs that it will be stuck above target for some time. As commodity prices are declining, strong wage gains and improved pricing power are creating a more domestically-driven inflation problem. Typically you can find strong correlation between the magnitude of inflation and its breadth across sectors. However, as inflation falls from its peak earlier this year, it appears to be broadening rather than contracting. This is particularly the case in the services sector, where strong wage growth is touching more industries. Jeremy Hunt has recently backed further interest rate rises by the Bank of England, even if it were to plunge the UK into recession in order to combat persistent inflation.
Having discussed the US debt ceiling last week, we can now be more confident that the likely outcome is a deal is signed into law before the ‘X-date’. President Biden and top congressional Republican Kevin McCarthy appear to be set on a deal that would raise the government’s $31.4 trillion debt ceiling for two years. An immediate impact of a debt ceiling deal will be the Treasury’s instant need to replenish the cash it burned through during the period of extraordinary measures when it could not borrow. Studying the events of the 2011 debt ceiling crisis may allow us to better understand how markets will behave in the coming weeks.
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