In today’s briefing:
- Currency Strength: Becoming Fashionable in the West, Less So in Japan and China
- UK: Retail Resilience Revealed as Mirage
Currency Strength: Becoming Fashionable in the West, Less So in Japan and China
- The Fed raised the ante in fighting inflation. Financial markets remain wary of downside risks, while even the Swiss National Bank raised its policy rate to counter rising inflationary risks.
- Financial fragmentation risks prevent the European Central Bank from engaging in Fed-style quantitative tightening, potentially prolonging higher inflation, while the Bank of England has been accused of being too timid.
- Pressure on China and Japan to tighten policy has been mitigated by low inflation compared to Western economies. Currency movements depend on central banks’ willingness to replicate Fed policy.
UK: Retail Resilience Revealed as Mirage
- April’s surprise surge in retail sales was revised away, and yet May contracted for the ninth time in the past year. Hawkish hopes of retail resilience were built on sand.
- High inflation is squeezing real incomes and consumption volumes as a natural progression of the pressures burning themselves out without hyperactive tightening.
- Overdoing rate hikes risks recession, but the housing market canary seems alive and well. Less depressed supply is finding demand, consistent with house prices not falling.
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