Mixed Start for Equities as Focus Shifts to Powell, China, and BoE

European Stocks Mixed, Asia Weak, US Returns to Trading 

Stocks in Europe were mixed in early trade on Tuesday after a down day Monday, Asia was mainly weaker and the US returns to the fray after the holiday. China stocks were down even as the People’s Bank of China cut its benchmark rate by 10 basis points, coming after last week’s cuts to short and medium-term rates. HSBC joins Goldman and others in slashing China GDP forecasts – reopening not going as planned. Australian shares rose as minutes from the RBA pointed to a potential pause in hikes. The FTSE 100 rose slightly as it dances around the 7,600 area, whilst the DAX in Frankfurt slipped below 16,100 after last week’s record high. With the US shut on Monday it was a little tired yesterday so back to it today. Crude oil is steady with spot WTI at $71.50 and gold doesn’t seem to go anywhere at the $1,950 area.  

BoE and the Interest Rates Scenario 

The Bank of England is getting all the attention this week with 2yr gilt yields popping above 5% for new 15-year highs, veering towards 5.1% today. Inflation remains way too sticky and the Bank carries some of the blame for not pushing back hard enough at the start. Key question this week would be whether it leans into the market pricing 6% terminal rate or pushes back against that narrative. So the question is more about the guidance they provide and the tone – the BoE has been loath to sound very hawkish at any stage of the hiking cycle and may continue to think inflation is going to come down due to lagged effects of hikes already carried out. After hiking in May, the Bank seemed comfortable with the asymmetry of the situation – inflation quick to go up, but slow to cool. Does it stick to this view?  

UK Still Battling Inflation 

UK CPI inflation for May is the big one ahead of the Bank of England meeting and another hot reading seems likely. Headline CPI dropped to 8.7% in April, from 10.1% the month before, but core inflation jumped to 6.8% from 6.2%, fuelling expectations the BoE will need to keep raising rates. Strong wage data last week further cemented the view in the markets that the MPC will do hike several more times, whilst the Bank has admitted its forecasting is not up to scratch. Core is likely to remain steady at 6.8%. Some good news on inflation today – relatively speaking – with grocery inflation at its slowest this year at a meager 16.5%. Labour is out with its green agenda, which will end oil and gas exploration in the North Sea and foist wind farms on every bit of corner of our country. Just to point out that China has produced more CO2 in eight years than the UK has in 220yrs. The whole nutty green agenda aside, I’m absolutely certain that a Labour government will lead to higher stickier inflation, higher gilt yields and more stagnation.   

Data Watch: US Housing and German Producer Price Inflation 

Not a hell of a lot of data today – US housing starts and building permits. German producer price inflation declined to just 1%, its lowest since January 2021….will Europe see consumer inflation normalise this year? Is the UK going to be the main outlier…? 

US Dollar Stabilizes and the Outlook for Gold 

The US dollar has stabilised in the last couple of sessions with short-dated Treasury yields firming. Sterling’s rally has paused around $1.28. Chair Powell speaks tomorrow.  

Gold – ready to break...are bulls exhausted? 100-day line looks key, very narrow and ever-tighter range...