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  • richard evans

Inflation up, are 50bps rate rises the new normal?

Good morning

US inflation yesterday hit 8.5%, higher than consensus, although the core CPI excluding food and energy came in a touch lower than expected at 6.5% y/y and 0.3% m/m. I’m not quite sure how this is the case given high food and energy costs but Feds Brainard latched onto the month on month slowdown and did not suggest she was pushing for a 50bps rise at the May meeting. Even so, 50bps seems to be the consensus view for now, indeed a run of two or three 50bps looks most likely from the Fed. Barkin seems to agree, he said Fed should move swiftly to neutral. I wonder whether the Fed are thinking of an even larger rise. USD remains firm.

GBP ticked a little higher initially on the higher than expected inflation print out this morning, GBPUSD trading up to 1.3025 but it failed to hold those gains and slumped to 1.2975 soon after. It is holding ground against the Euro, EURGBP now 0.8335 (GBPEUR 1.1995) which suggests the move lower in GBPUSD is more about USD strength.

GBP seems unaffected by the news that Johnson and Sunak have received fines for attending lockdown parties. I am sure Johnson said if he was found to have broken the law, he would resign. I don’t think he was ever going to resign over these parties, not sure he thinks they were serious enough. Some of his Tory colleagues who had been calling for him to quit have been pretty quiet. Who would want to take over now anyway?

RBNZ surprised many with a 50bps rate rise overnight to 1.5%. Such a move had been talked about but most seemed happy with a 25bps rise. RBNZ said the 50bps move now will reduce the risks of inflation expectations rising and they are happier to make larger rises now rather than later, leading to some suggestions of another 50bps rise at their May meeting. NZDUSD pushed up to 0.6900 but has since dropped back to 0.6795, while AUDNZD traded down to 1.0825 before bouncing to 1.0940. The weakness in NZD since the announcement is likely to be that, despite, the faster than expected rise, the RBNA did not move their ultimate target rate of 3.35%, still well below the markets 4.2% v.

China trade surplus came in significantly higher than expected overnight, more than doubling the estimate of $22.4bn, reaching $47.38bn. No surprise that imports were down and exports were up! Also in China, there is talk the Shanghai Covid restrictions are being lifted although many millions still remain locked down. A longer period of lockdown will increase the chances of further supply chain disruption which could, in turn, push inflation higher still.

So, quite a heavy day although currency market moves are really still pretty muted. BoC rate announcement today and I reckon they are likely to follow suit and raise 50bps themselves to 1%, which should be pretty much priced in. USDCAD currently 1.2640. Aussie employment numbers overnight always tend to generate some excitement, while tomorrow we have the ECB rate announcement.

With central banks seeming to prefer 50bps rises over 25bps moves, I do wonder how ECB will react. They are certainly slow to move rates and there must be a concern that they will soon get left behind. I fear a little bit for the Euro, if rate remain negative while others push higher it must surely become the funding currency of choice. I wonder whether they will say anything to counter that idea. More on that tomorrow.

- 13.30 US PPI

- 15.00 BoC rate announcement

- 16.15 BoC press conference

- 22.30 NZ business PMI

- 02.00 AUS consumer inflation expectation

- 02.30 AUS unemployment


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