“UK Inflation…”

Inflation in the UK dropped to its lowest since June 2016 last month amid dry demand from the global economy and a drop in oil prices.  The Office for National Statistics said that consumer price inflation slowed to 0.5 percent from 0.8 percent in April.  Meanwhile, core inflation which excludes volatile energy, food, alcohol and tobacco prices showed less of a decline dropping to 1.2 percent from April’s 1.4 percent.  Major factors that pushed down inflation in May included fuel, clothing and transport costs. Prices for fuel and lubricants showed their biggest annual drop on record, down by 16.7 percent, while clothing prices were 3.1 percent lower, the biggest drop since July 2010.  Prices dropped for toys and games after they climbed in April as families looked for new ways to keep themselves entertained.  Producer output prices that indicates the upcoming price pressures dropped by a greater-than- expected 1.4 percent after dropping by 0.7 percent in April.

BREXIT

On Monday leaders from Britain and the European Union agreed that  talks on their future relationship should be stepped up to clinch a deal.  Prime Minister Boris Johnson suggested an agreement could be reached in July with “a bit of oomph”.  Johnson said, “I don’t think we’re actually that far apart but what we need now is to see a bit of oomph in the negotiations”, said Johnson, adding that he had told the EU’s top representatives that there was a need to “put a tiger in the tank” of the talks.  Earlier during a video conference Johnson, European Commission President Ursula von der Leyen and the leaders of the European Council and European Parliament, said that the two sides “agreed that new momentum was required.”

Unemployment in the UK

The number of people that lost their job in the UK due to COVID increased by more than 600,000 in April and May as the coronavirus lockdown hit the labour market and vacancies dropped by the most on record, said official data on Tuesday.  The jobless rate unexpectedly held at 3.9 percent over the three months to April, despite a record slump in overall economic output during that period.   Before the coronavirus pandemic commenced, Britain’s job market was strong, and the ONS said many of those who lost their jobs in April were not actively looking for work and counted as ‘inactive’ rather than unemployed.  Meanwhile, Prime Minister Boris Johnson, who is under pressure to ease the slump in the economy, has ordered a review of Britain’s two-metre social distancing rule which many employers say is stopping them from getting back up to speed.  Johnson and finance minister Rishi Sunak are reportedly considering increasing a tax incentive for small firms to hire workers and suspending social security payments by employers.  The ONS said the number of hours worked per week dropped by the biggest amount on record, falling to 959.9 million in the three months to April from 1.041 billion in the three months to March, reflecting the scale of the jobs furlough scheme which covers about 9 million jobs.  

The Bank of England

The Bank of England on Thursday slowed the pace of its bond-buying programme amid signs that the British economy was recovering from the slump caused by the coronavirus lockdown.  The Bank said the economy seemed to be contracting less severely than it thought a month ago as the government eased its COVID-19 lockdown, but it was too early to talk about the strength of the rebound and more action might be needed.  According to Deputy Governor Ben Broadbent the BOE now estimated that the British economy was heading for a roughly 20 percent contraction over the first and second quarters of 2020, compared with a fall of about 27 percent included in a scenario it published in May.  The latest round of bond-buying will be spread out over the rest of the year, a third of the Bank’s pace of purchases since the crisis escalated in March when it announced a record 200 billion-pound increase in its programme.  The news about the reduction in the pace of purchases came as a surprise.   The BoE kept its key interest rate at 0.1% and no discussions were held about dropping them to below zero.  Furthermore, the recent payment data and other up-to-date indications from the economy suggested that consumer spending could already have reached a level that it previously expected would only be reached by the third quarter.  There are however risks that the increase in unemployment could be much worse than it had been expected.  Meanwhile the central bank said that pumping more stimulus into the economy will help it meet its 2 percent inflation target.  According to data on Wednesday, annual inflation in May amounted to 0.5 percent.

German Investor Morale

German investor sentiment climbed more than expected in June amid hopes that the worst of a sharp downturn in Europe’s largest economy prompted by the coronavirus pandemic will be over by the summer according to a survey on Tuesday.  The ZEW research institute said its monthly survey showed economic sentiment among investors climbed to 63.4 from 51 in May.    

US Retail Sales

US retail sales increased by the most on record in May after two straight months of sharp declines as businesses reopened. Retail sales jumped 17.7 percent last month, the biggest advance since the government started tracking the series in 1992.  Meanwhile, in April sales dropped a record 14.7 percent in April.   The report form the Commerce Department on Tuesday followed news earlier this month, that the economy created 2.5 million jobs in May.  Layoffs are dropping and manufacturing activity is improving though production remains at very low levels.  Jerome Powell told US lawmakers on Tuesday, that “until the public is confident that the disease is contained, a full recovery is unlikely.”  The economy slipped into recession in February.  Retail sales fell 6.1 percent on a year on year basis in May.  Although sales in May picked up, they were still 8 percent below their February level, leaving consumer spending and the economy on track for their biggest contraction in the second quarter since the Great Depression.     

The FED

On Monday the FED said it had opened registration for lenders interested in participating in its Main Street Lending Program.  The latter is the most complex program undertaken yet by the US central to help the economy from the impact of the pandemic.  The program aims to offer credit to companies that may be too large to qualify to help from the Paycheck Protection Program, which targets businesses with few than 500 employees.  Unlike the PPP, which was established by Congress in late March and offers loans that can be converted to grants if businesses meet certain requirements, the loans offered by the Main Street program must be repaid.  The Federal Reserve announced that it will start buying corporate bonds on Tuesday through the secondary market corporate credit facility (SMCCF).  This is one of several emergency facilities recently launched by the FED to improve market functioning. The FED will be using an indexing approach when undertaking purchases aiming to create a portfolio that is based on a broad, diversified index of US corporate bonds.  The purchases will complement the other asset purchases made by the SMCCF which began buying shares of broad-based exchange-traded funds in mid-May.  Stock market climbed after the announcement on Monday afternoon.  The corporate bond purchases will be based on an index that is “made up of all the bonds in the secondary market that have been issued by the US companies that satisfy the facility’s minimum rating, maximum maturity and other criteria, “ said the FED on Monday. 

Bank of Japan

The Bank of Japan is one of a number of major central banks that pumped trillions of dollars in the financial systems to support businesses hit by the coronavirus pandemic.  The Bank of Japan kept monetary settings ready on Tuesday and kept its view that the economy will gradually recover from the coronavirus pandemic, indicating that it has taken the necessary steps to support growth for now.  It however increased the nominal size of its lending packages for cash-strapped firms to $1 trillion from about $700 billion announced last month.  In a widely expected move, the BOJ maintained its yield curve control targets at -0.1 percent for short-term interest rates and 0% for long-term rates.  The central bank also made no major changes to its programmes to ease corporate funding strains, including a lending facility aimed at channelling funds to firms. The central bank said, due to the way it is designed, the amount of money to be pumped out through the programmes will reach 110 trillion yen if more loans are taken out via government schemes.   

Market Wrap

US Treasury yields rose on Monday as stocks recovered from earlier losses and after the FED said it would expand its purchases of corporate bonds, boosting risk appetite.  Benchmark 10-year note yields gained one basis point to 0.708 percent.  They dropped from an 11-week high of 0.959 percent on 5^th June, when data showed that employers unexpectedly added jobs in May.  The yields dropped earlier on Monday on renewed concerns over the spread of the coronavirus.Italian bonds which are deemed to be risky assets, outperformed with the ten-year bond yields falling to their lowest since late March at 1.37 percent before reaching 1.4 percent.  The two-year yields fell almost 8 bps to 0.15 percent their lowest since early March.  The Italian/German 10-year bond yield gap was at 184 bps down 52 bps from where it stood a month ago.  Germany’s 10-year bond yield briefly dropped to -0.47 percent, its lowest in almost three weeks, before rising in late trade.  Last week it dropped 18 bps, registering its best week since February.  The ECB bought a net of 36.100 billion euros of assets last week as part of its quantitative easing programme, below the 38.917 billion euros it purchased a week earlier, it said on Monday.   European shares joined the global rally on Tuesday with sentiment lifted by the launch of the US Federal Reserve’s corporate bond buying plan and easing concerns of a second wave of global coronavirus infections.  The pan-European STOXX 600 index rose 2.2 percent recouping from a slump in the previous sessions that was affected by gloomy forecasts of an economic rebound from the COVID-19 pandemic and a resurgence of infections in the US and Beijing.  The pan-European STOXX 600 index .STOXX is now only about 17 percent below its February record high.  European travel and banking stocks, which were badly hit during the health crisis, remain more than 30 percent down on the year.  The German DAX index added 2.5 percent, while Italian .TMIB and British .FTSE bourses rose 2.2 percent and 2.5 percent respectively.  On Wall Street the S&P 500 lost 0.36 percent on Wednesday but the heavy tech NASDAQ added 0.15 percent amid hopes of increased demand for various online services due to the pandemic.  Asian stocks and Wall Street Futures fell on Thursday as the coronavirus cases spiked in US States and China crushed any hopes of quick economic recovery from the pandemic.  Japan’s Nikkei lost 1.3 percent.   Meanwhile, European shares also closed lower.  Investors took a step back from risk as the daily count of cases increased in California and Texas while Beijing increased restrictions.  On Friday European shares opened higher ahead of the European Council’s meeting to negotiate the EU recover fund.  The pan-European STOXX 600 rose 0.5 percent with Frankfurt shares leading the gains.  The European Council will have its first meeting to discuss a commission’s proposal to raise EUR 750 billion worth of debt to top up spending from joint finances to be worth 1.1 trillion euros in 2021 to 2027.   

Currency Roundup

The pound steadied near two-week lows against the dollar and the euro on Monday as fears of a second wave of coronavirus hit risk sentiment and global markets. Investors were also nervous ahead of a key meeting on Brexit negotiations.  Meanwhile, leaders from Britain and the European Union agreed on Monday that talks on their future relationship should be stepped up to reach a deal, with Prime Minister Boris Johnson suggesting an agreement could be reached in July with a “bit of oomph.”  With a status-quo transition deal set to run out at the end of the year, Britain is seeking a free trade agreement with the EU, which it left on Jan. 31, but negotiators have so far made little progress. Investors were looking forward for the Bank of England meeting to be held on Thursday, where it was expected to announce a fresh increase of at least 100 billion pounds on its bond-buying action.  The euro was little changed against the US dollar on Tuesday as the US Federal Reserve prepared to start its corporate bond-buying scheme, while a report flagged the possibility of more fiscal stimulus that boosted investor confidence.  After a 2 percent rise so far this month, the euro was close to near $1.15 which is the year’s high. On Tuesday the Federal Reserve said it will be buying corporate debt as part of an already announced stimulus scheme, and launched its Main Street Lending Program for businesses.  Investor sentiment was further supported by the belief that authorities will do what it takes for the economy to get back on track. Wednesday saw the dollar little changed after US retail sales increased more than expected in May.  Investors were cautious and stayed away from buying riskier currencies such as the Australian dollar.  Against a basket of other currencies, the dollar edged 0.1 percent lower to 96.89.  The Fed’s Jerome Powell said that a full US economic recovery will not occur until the American people are certain that the coronavirus pandemic is under control.  The cautious message from the Fed also checked the momentum in the euro which held below a three-month high of $1.1422 reached last week and was trading at $ 1.1286 on Wednesday after climbing 5 percent since the proposal by France and Germany over the recovery fund in late May.  Meanwhile, the sterling was steady around $1.2576 amid the Brexit developments that continued to supress the pound.   The Australian dollar lost 0.4 percent to $0.6852 as it was hit by worse than expected employment data.   The safe-have yen rose about 0.3 percent to 106.72 per dollar while the US dollar also firmed against risk-sensitive currencies.  Australia’s unemployment rate jumped to its highest in about two decades in May as nearly a quarter of a million people lost their jobs due the shutdowns.  

Oil

Oil prices rose on Monday amid signs that demand for fuel was recovering and OPEC+ members complying with a production cut deal, outweighed concerns that the resurgence of infections from coronavirus could further slow global economy growth.  US West Texas Intermediate crude rose 1.2 percent to $36.70 a barrel while Brent crude climbed 1.7 percent to $39.40 a barrel.  Prices also recovered from early losses after the energy minister of the United Arab Emirates showed confidence that OPEC+ countries with poor compliance to the agreed cuts, would meet their commitments and reported that oil demand was picking up.  Meanwhile on Thursday an OPEC-led monitoring panel will meet on Thursday to discuss whether countries have delivered their share of output reductions.  Meanwhile, Iraq agreed with its major oil companies to cut crude production further in June according to Iraqi officials working at the country’s giant southern oilfields.  Saudi Arabia has also reduced the volume of July-loading crude it will supply to at least five buyers in Asia according to sources. 

Coronavirus

Global cases of the novel coronavirus have reached over 8 million.  Deaths stand at over 434,000 and have doubled in seven weeks.  Meanwhile, Beijing banned some people from leaving the Chinese Capital and halted transportation services on Tuesday to try to contain a fresh coronavirus outbreak. 

Malta:  Harmonised Index of Consumer Prices (HICP) May 2020

In May 2020, the annual rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) was 0.9 percent, a drop from the 1.1 percent in April 2020.  The largest annual impact on annual inflation was measured in the Food and Non-Alcoholic Beverages Index, while the largest downward impact was recorded in the Education Index.  The HICP measures the monthly price changes in the cost of purchasing a representative basket of consumer goods and services.  It is based on rules specified in a series of European Union Regulations that were developed by Eurostat in conjunction with the EU Member States. 

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