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Markets React to US Inflation as Focus Turns to ECB

Thought for Thursday, trial in Vietnam over bank fraud, highest levels of US headline inflation, Israel and Iran tensions escalate, monetary policy meeting for the ECB this afternoon, and Simon Harris becomes the youngest person to lead the Republic of Ireland.

US House Approves Aid for Ukraine This weekend, the US House of Representatives passed a fresh military aid package for Ukraine worth $61bn. This came as 311 Representatives supported the bill against 112 who opposed it and

Thought for Thursday

“This is the essence of intuitive heuristics: when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.” – Daniel Kahneman, Thinking, Fast and Slow

Good Morning Vietnam

There’s a quite amazing story on the BBC today about a trial in Vietnam over bank fraud. The fraud looks like the largest ever and concerns the equivalent of $44bn US dollars! It’s too long a story to do any kind of justice in a few sentences, but such is the severity that it will have national repercussions and as well as the main defendant, could well bring down hundreds of officials in the process.

Vietnam’s political head of state is overseeing the “blazing furnaces” anti-corruption drive that has led to the trial and they’re making this a big media spectacle. Interestingly though, there’s a paradox that the government is wrestling with; they want to achieve “rich country” status by 2045, but to accelerate their economy at such a pace to get there “corruption has been the great that kept the machinery working. If they stop the grease, things may not work anymore.

A fascinating story – almost certainly a box set in the making – and the link is here: Truong My Lan: Vietnamese billionaire accused in multi-billion dollar bank fraud – BBC News

Markets Downwardly Revise Rate Cuts from Fed Following Inflation Beat

Yesterday, headline inflation in the US came in at its highest level since September as it rose 30bps from the previous month’s print and 10bps above expectations. The rise in inflation saw markets downwardly revise rate cut expectations from the Fed as they considered how the central bank would keep rates higher for longer in order to bring inflation down to its 2% target. For example, going into the start of yesterday session money markets were implying that the Fed would conduct three cuts by the end of the year, however this has now been revised lower to less than two.

Expectations of tighter monetary conditions in the US saw a dollar-on move which saw the DXY Dollar Index rise to 5-Month highs of 105.

Tensions Between Israel and Iran Continue to Escalate

Diplomatic tensions between Iran and Israel are continuing to increase, as Tehran threatens to attack Israel.

Last Monday Iranian officials said that their consulate building in Damascus was damaged by an air strike which they attribute to Israel. It’s understood that thirteen people were killed in the strike. Amongst those killed was Brig-Gen Mohammad Reza Zahedi, a senior commander of the elite Quds Force who commanded Iranian forces in Lebanon and Syria between 2008 and 2016.

In a televised address to Iran, Ayatollah Ali Khamenei stated that “When they attacked our consulate area, it was like they attacked our territory”. Khamenei went on to indicate that Iran would conduct a retaliatory action, though analysts remain uncertain of what form such an action could take. Some for example are suggesting that Iran could attack via a proxy group such as Hezbollah.

Speaking on the subject, US President Joe Biden said that “As I told Prime Minister Netanyahu, our commitment to Israel’s security against these threats from Iran and its proxies is ironclad — let me say it again, ironclad”.

The New York Times is running a piece which writes on how Iran is running a “clandestine smuggling route across the Middle East” to bring weapons to Palestinians in the West Bank and “flood” the region with arms. These weapons pass through countries including Iraq, Syria, Lebanon, Jordan and Israel.

ECB Policy Meeting

At 1315 this afternoon, attention will turn to the ECB’s monetary policy meeting where it is expected that they will again hold rates for the fifth consecutive time. This would keep their main refinancing operations rate at 4.5% (a 22 year high), while their marginal lending and deposit facility would remain at 4.75% and 4%, respectively. With markets continuing to assess the impact that easing inflation and sluggish growth across many of the Eurozone’s constituent parts will have on Frankfurt’s future monetary pathway, money markets are implying that there is around a 80% chance of a rate cut by June.

Ireland

We’re a little late to the party, but on Tuesday Ireland’s new taoiseach (prime minister) was sworn in and becomes the youngest person to lead the Republic of Ireland, at 37 years of age. Simon Harris now heads the Fine Gael party, which is in a three-way coalition government. He now has just a few months in the top spot before local and European elections taking place in June and a job to turn around his party’s fortunes, as they came third in 2020 elections, and it was Sinn Fein who won the popular vote for the first time.

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