Market Report 06-05-2022

Published: 06/05/2022 By ECAP

Yesterday saw Sterling drop below the 1.24 mark versus the US dollar, its lowest level since mid-2020, after some more muddled communications from the Bank of England. As expected, interest rates were raised by 25 basis points to 1%, the highest level seen since 2009. The MPC however, appeared more divided on policy than we’ve seen in some time. The vote on interest rates was more hawkish than markets had expected, with all nine members in support of an immediate hike. In a surprise move, three of the nine members (Mann, Haskel and Saunders) were all in favour of a 50 basis point move higher in rates.

It was the rhetoric that followed that caused the Sterling drop off, as it failed to provide market participants with much clarity. The bank’s inflation assessment was upgraded in light of rising global commodity prices. Headline inflation is now set to peak in excess of 10% later this year, with the 1-year inflation forecast raised to 6.65% from 5.2%. Governor Andrew Bailey also said that the UK labour market was very tight, and the bank’s year-end forecast for wage growth was increased to 5.75% from the 3.75% expected in February. While all of the above warrants an aggressive pace of tightening, the MPC appears growingly concerned about the impact of rising commodity prices on the UK economy. Bailey said that inflationary pressures had intensified, and that Russia’s invasion of Ukraine had led to a material downturn in the growth outlook globally.

Attention in markets today will quickly turn to this afternoon’s US nonfarm payrolls report. Investors are eyeing another strong payrolls number just shy of the 400k mark, with an upward revision to the March data likely, in the markets view, given the preliminary estimate has been revised higher in each of the past seven months, so the market will be edging on the side of a strong number being published.