Take Five: inflation is still the name of the game

A shopping cart is seen in a supermarket as inflation hit consumer prices in Manhattan, New York, U.S., June 10, 2022. REUTERS/Andrew Kelly

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(Reuters) – The latest U.S. inflation figures are in the crosshairs of markets, especially as Federal Reserve policymakers came out in force to correct any misconceptions about their determination to stamp out inflation , high for decades, by sharp rate hikes.

The fallout from Nancy Pelosi’s high-profile visit to Taiwan will be watched closely, as will data from China and Britain, while Ukraine hopes for a freeze on debt payments from international investors.

Here’s to your week ahead at the markets of Kevin Buckland in Ottawa, Ira Iosebashvili in New York and Andy Bruce, Karin Strohecker, Dhara Ranasinghe and Vincent Flasseur in London.

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1/ RED FOR MUCH LONGER?

Wednesday’s July U.S. inflation is shaping up to be a key test for a summertime rally in U.S. stocks that propelled the S&P 500 to multi-week highs.

The benchmark is up 14% from its mid-June low, supported in part by expectations that the Federal Reserve will be less hawkish than expected.

Fed officials pushed back on the idea that they would be less aggressive in a so-called dovish pivot.

Any sign that inflation is yet to peak after the Fed’s 225 basis point rate hikes could provide a reality check for markets hoping for a soft landing for the economy. Read more

Analysts polled by Reuters forecast annual inflation of 8.9% in July from 9.1% in June, the biggest increase since 1981. read more

2/ TROUBLE IN THE EAST

The visit of US House of Representatives Speaker Nancy Pelosi to Taiwan, which China claims as its own territory, means US-China tensions are rising again. Read more

To be fair, the sell-off in global equities and the Taiwanese dollar as well as the rush into safe havens such as US Treasuries quickly died down. Read more

Yet, the market’s sensitivity to political risk has been elevated since Russia’s invasion of Ukraine in February. China launched unprecedented live-fire military drills in areas surrounding Taiwan after Pelosi’s visit. Taiwan says it violates UN rules and invades its territorial space.

Scalded by Russia, investment funds have already begun to show caution in China. No doubt investors will remain alert to further signs of trouble in the East. Read more

3/ CHEAP MONEY

Cash is cheap in China, due to its abundance circulating amid government measures to support an economy marked by zero-COVID policies.

The policy rate, the overnight repo rate, languishes at a one-and-a-half-year low below 1%, and data due as early as Wednesday will show the state of new lending and total money supply.

Conditions must be easy, with the country on the verge of missing its initial growth target of 5.5%. Beijing has decided to keep economic expansion within a “reasonable range”. Read more

Fortunately, consumer price inflation has been manageable at 2.5%, well below the official target of 3%, although it is nearing two-year highs. The last reading is also due on Wednesday.

COVID, however, has been more temperamental, with a new outbreak in the port city of Yiwu threatening further supply chain rumbles. Read more

4/ RECESSION WATCH

How close is Britain to falling into recession? That’s the big question ahead of next Friday’s economic growth figures, after the Bank of England’s dismal forecast. Read more

The BoE estimates that a new slump will start at the end of this year, but other leading forecasters, such as the National Institute for Economic and Social Research, think it could start in the current quarter.

A darkening economy is increasingly encroaching on Britain’s leadership race, casting doubt on the merits of favorite Liz Truss’ proposed welfare tax cut speech, and calling for the budgetary discipline of opponent Rishi Sunak. Read more

Any nasty surprises in Friday’s data – which covers monthly GDP for June and the second quarter as a whole – could further alter the tenor of the debate.

5/ SEEK HELP

Ukraine’s international bondholders have until August 9 to vote on whether to back Kyiv’s demand for a two-year debt payment freeze as the country’s struggling economy s collapsed under the war in its sixth month.

The government faces a $1 billion bond maturing on September 1, as policymakers scramble to close a $5 billion-a-month fiscal gap, with GDP expected to contract 35-45% this year.

Meanwhile, there are tentative signs grain shipments could resume after the first ship to leave a wartime Ukrainian port sailed through the Bosphorus Strait on Wednesday. Hopes are high that it will be the first of many to help ease a global food crisis and provide much-needed foreign exchange earnings to Ukraine. Read more

Chicago wheat futures’ prices slipped to their lowest since early February.

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Compiled by Dhara Ranasinghe; edited by Jason Neely

Our standards: The Thomson Reuters Trust Principles.

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