Early Morning Call: UK consumer confidence rises for fourth straight month

Indices overview

The European equity market opened higher this Friday. In Germany the DAX is points away from its all-time high set at the end of 2021. In Japan, equity rally continues. The Nikkei 225 is poised to post its best weekly gains since March 2022.

Gfk consumer confidence

British consumer confidence meanwhile improved for a fourth straight month. According to the GfK survey, the consumer confidence index rose to a 15-month high: -27 in May from -30 in April. Last September the index hit a record low of -49. That was when Liz Truss and Kwazi Kwarteng threw financial markets into turmoil with their mini-budget.

The economic context remains very difficult for households. Inflation remained at 10.1% in March, with the cost of food and drinks rising by the most in 46 years. But so far, recession has been avoided in the UK and consumers' view of the economy over the next 12 months has improved to -30 from -34 in April. As for their view on their personal finances, it improved by five points to -8.

Japan inflation

Japan inflation keeps accelerating. Headline consumer price index (CPI) unexpectedly rose 3.5% in April year-on-year (YoY), after 3.2% in March. Economists anticipated the index to cool to a 2.5% increase. The core consumer price index, excluding fresh food but including energy, rose 3.4% in April YoY, picking up from a rate of 3.1% in March. And core-core CPI, excluding food and energy, rose to 4.1%. This marked the fastest annual pace of Japanese inflation since September 1981. This is the barometer favoured by the Bank of Japan (BoJ).

When the bank talks of its 2% target, it refers to the index stripped from food and energy prices. For economists, the BoJ has little choice but to revise up its inflation forecast in July, which keeps alive expectations of a tweak to the bank's massive stimulus this year.

US debt ceiling

Prior to Japan CPI data, the US dollar rose to a six-month high against the yen yesterday. Optimism over debt ceiling talks in Washington raised expectations of higher-for-longer interest rates. President Joe Biden and top US congressional Republican, Kevin McCarthy are determined to strike a deal soon to raise the government's $31.4 trillion debt ceiling. There are hopes a deal will be finalised when Biden returns from the G7 meeting in Japan this weekend.

Also, not in favour of a pause of the interest rate tightening cycle, two Fed policymakers said on Thursday that US inflation does not look like it is cooling fast enough.

Commodities

Wheat prices are poised for another week of declines as the deal that allows Ukraine to export grains through the Black Sea was extended for two months on Wednesday. Three new ships were also authorised to take part in the deal yesterday. This agreement came as a surprise.

Russia had been threatening to quit the Black Sea agreement if a list of its own demands was not met. These demands were related to its own grain and fertiliser exports. According to the Kremlin, results from talks had given it "certain hopes", but more progress needs to be made.

Corn is also losing ground, partly on expectations of a large global crop to come, but also on falling demand. The latest US Department of Agriculture weekly report showed net sales reductions of US old-crop corn due to cancellations from Chinese buyers.

Yesterday, the International Grains Council raised its forecast for 2023/24 global corn crop by nine million tonnes, reflecting improved an outlook for production in Brazil and China.

Soy supply is rising in the US, setting soybean prices for its biggest weekly drop in eight months. According to the Department of Agriculture, weather conditions in the US Midwest remain generally favourable and planting is advancing faster than normal.