Daily Market Outlook, July 21, 2022

Overnight Headlines

Asian equity performance is mixed this morning. Italian PM Draghi won a confidence vote in parliament yesterday, but with key coalition partners not taking part, reports suggest that his government is close to collapse. President Biden said he will speak to Chinese President Xi as he considers lifting some sanctions on Chinese exports. Reports suggest that Tokyo will lift its Covid warning level to the highest rating amidst a surge in cases. Meanwhile, the Bank of Japan left monetary policy unchanged after its latest meeting. UK public finances data for June showed net borrowing at £22.1bn, about £3.5bn higher than at the same point a year ago.

The European Central Bank is expected to raise interest rates for the first time since 2011. The announcement is due at 1.15pm and the press conference at 1.45pm. Conditions for interest rate lift-off have already been met and the ECB has signalled its intention to raise rates today and at forthcoming meetings. A hike of 25bp is expected although there has been speculation that ECB policymakers may opt for a larger move of 50bp. Policymakers have already indicated that a further increase is likely at the subsequent policy meeting in September and that they might then move by 50bp ‘if the medium-term inflation outlook persists or deteriorates’. Given the prospect that interest rate rises may lead to a widening of euro area peripheral bond spreads, the ECB has promised to unveil a new anti-fragmentation policy tool. Markets will be hoping for some details on this today, including its size and how it would be deployed. However, press reports suggest that discussions on the new instrument are still ongoing.

The latest weekly jobless claims will provide a timely insight into the state of the US labour market ahead of next week’s Federal Reserve monetary policy update. The Fed remains concerned that a tight labour market could further fuel wage growth. The June monthly NFP report showed little sign of those pressures easing. However, since then, the weekly jobless reports have moved upwards. They are still low by historic standards, but the recent turnaround is nevertheless tentative evidence that the jobs market may be softening.

Early Friday, UK July GfK consumer confidence and June retail sales will give indications of the impact of the ‘cost of living squeeze. Confidence has dropped sharply this year. We look for a small rebound in July but it is still forecast to be close to all-time lows. June retail sales may have been boosted by preparations for the Jubilee celebrations. However, any such impact is likely to be temporary.