Us inflation: persistent.
April inflation at 8.3% marked a slow down vs March’s at 8.5%. However, the April print was still above the 8.1% expectation and demonstrated the sticky-nature of current inflationary trends, with services and core components (lodging, air fare) remaining elevated. The Fed continued to signal for 50bps hike over the coming months, but downplayed the need for a 75bps hike. We expect inflation to remain above 5% in to year end, thereby warranting the Fed to retain a financial restrictive stance at least until year end.
ECB: Hikes as early as July.
Lagarde indicated that the purchase program could end in June, with a rate hike only shortly after. Echoing the sentiment, ECB board member Holzmann backed the idea of 3 hikes this year. Unlike the US, European inflation is still mostly energy driven, which has allowed the ECB to maintain a dovish stance despite above-average inflation. However, with persistent inflation, even the most bearish growth forecasts above 1.2% growth in 2022 and the EUR at historical low levels, the ECB now appears behind the curve and we expect them to raise 2-3 times this year.
Brexit: a distraction.
PM Johnson has floated the idea of tearing up the Northern Ireland Protocol, a key feature of the Brexit agreement. The PM has likely chosen to do this to distract from the main issue in the UK: the cost of living crisis. The BoE was incredibly behind the curve with regards to tackling inflation. The cost of living crisis is affecting an increasingly number of Briton, with a recent survey reporting 2m unable to afford to eat everyday. We expect the BoE to remain behind the curve and hence for the cost of living crisis in the UK to persist. This is likely to present a challenge to UK business, especially those exposed to the consumer. We therefore remain bearish on the pound and UK assets.
Algebris Investments’ Global Credit Team
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