Asian equity markets are mixed but there were signs of improving risk sentiment, helped by some positive corporate earnings announcements and despite ongoing hawkish Fed remarks. The return of fiscal prudence under new UK Chancellor Hunt has also steadied sterling markets, resulting in lower gilt yields. The BoE announced yesterday evening that it will go ahead with active gilt sales (QT) from 1 November despite media reports to the contrary.
UK September CPI inflation data released earlier this morning showed an increase in the headline rate back into double digits, rising to 10.1% from 9.9% in August. The outturn was marginally higher than market expectations and means inflation has returned to July’s recent high. Higher food prices were the main driver of this month’s rise, which was partly offset by lower petrol prices. Particularly concerning for BoE rate setters is that the underlying core rate of inflation, which excludes the volatile food and energy components, increased to 6.5% from 6.3%.
There will be significant attention on Prime Minister’s Questions at midday, the first since the instalment of the new Chancellor. Later in parliament, the BoE’s deputy governor for financial stability, Jon Cunliffe, will testify to the Treasury Select Committee on the emergency gilt market interventions which ended last week. External MPC member Catherine Mann will take part on a panel to discuss the pound’s exit from the ERM thirty years ago.
In the Eurozone, the final estimates of September CPI inflation are expected to confirm prior ‘flash’ readings of an increase in the headline rate to 10.0%, up from 9.1% in August and the highest since the inception of the euro. The core rate rose to 4.8% from 4.3%. Today’s final reading will offer greater detail on the components driving the rise in inflation.
The US focus will be on housing data, the Fed Beige Book and some Fed speakers. Housing starts are forecast to fall, reflecting weakening demand amid rising interest rates. St Louis President Bullard is due to give opening remarks at an event, while Chicago Fed President Evans discusses the economic outlook. Canadian September CPI inflation data are also due and are forecast to fall for a third month to 6.8% from 7.0%.
Gilt yields fell again yesterday, with the 30-year yield ending down 7bp to 4.31%, the lowest close for two weeks. The reaction of gilts to yesterday’s BoE QT announcement and this morning’s UK inflation data will be closely watched. In FX, sterling edged lower in immediate reaction to the inflation figures. Meanwhile, Japan continued to warn against the weakness of the yen.
A recovery in risk appetite has pushed equities higher across Asia, despite ongoing concerns over the health of China’s economy, particularly after it delayed the release of its Q3 GDP report. Sentiment has been further bolstered by reports that the Bank of England is set to delay quantitative tightening (QT). With recent UK fiscal events having generated significant volatility in bond markets, the move has been seen as a positive attempt to bring about some stability, particularly in the UK gilt market.
Meanwhile, the release of the minutes to the Reserve Bank of Australia’s last policy meeting – where it hiked by a less-than-expected 25bp – showed that the central bank still expected interest rates to rise further. However, it also noted the need to balance the objective of lowering inflation against keeping the economy on an even keel.
Yesterday’s fiscal announcement by the recently appointed UK Chancellor, Jeremy Hunt, saw the government reverse more of the measures announced as part of the previous Chancellor’s mini budget, hot on the heels of last week’s news that the freezing of the rate of corporation tax would also be abandoned. Notably, all but those measures that were already progressing through parliament – the NICs cut and the stamp duty reduction – were dropped. These cuts amount to around £32bn of expected savings by 2026/27, on top of which the Chancellor also confirmed that the Energy Price Guarantee scheme would only continue in its current form until April, after which it would become more targeted. Financial markets responded positively to the announcement with UK government bond yields dropping noticeably on the day. Nevertheless, they remain higher relative to the 23rd September, prior to the previous Chancellor’s fiscal announcement.
Today’s focus is likely to be elsewhere, with no major events or key data releases due in the UK. The German ZEW survey for October is forecast to show further deteriorations in both the future and current expectations components, building on the sharp falls in sentiment seen already this year. Despite signs of economic weakness, ECB officials overall have remained hawkish and shown a determination to bring inflation down, which rose to 10.0%y/y in September and later today we hear from policymaker Schnabel. In the US, the industrial production report for September and the NAHB housing market index report for October are due this afternoon. Meanwhile, Fed members Bostic and Kashkari are due to speak at separate events.
Early tomorrow morning, the latest UK inflation release is likely to prompt some interest. We expect that to show a rise in annual headline CPI inflation to 10.2% in September, a new high for 2022.
Following reports that the Bank of England was likely to delay quantitative tightening, the pound initially strengthened but has given up those gains to trade lower on the day. Nevertheless, GBP/USD and GBP/EUR remain up on the week, following the positive reception given by markets to the UK chancellor’s announcement yesterday.
Market risk sentiment remained soft at the start of the new week, with equities across Asia mostly trading lower overnight following on from the falls seen in US stocks on Friday. Notably, Chinese equities were trading lower following President Xi’s defending of the country’s zero Covid policy, suggesting that there would be no near-term easing in restrictions that were continuing to hamper the economy.
The political situation in the UK has been a key focal point for financial markets in recent weeks and today is likely to be no exception. Earlier this morning, the Treasury announced that the new Chancellor, Jeremy Hunt – who replaced Kwasi Kwarteng in the role last Friday – would make a statement later today. Prior to that, speculation had been rife for a few days that policy U-turns were in the pipeline and resulted in an announcement that next April’s planned rise in Corporation Tax, from 19% to 25%, would go ahead having previously been cancelled in the ‘mini-budget’.
Over the weekend, the newly appointed Chancellor indicated that nothing was “off the table” and said that all the measures announced previously by Mr Kwarteng would be looked at again, with the prospect that further pledges made by the PM would be abandoned. Speculation over the weekend suggested that the planned 1p reduction in the basic rate of income tax would also be dropped, while the PM and Chancellor both noted that increases in public spending would go up less than previously expected. Media reports suggest that all of Kwasi Kwarteng’s £45bn of unfunded tax cuts, except for the reduction in NICs, will be scrapped. Today’s statement at 11:00BST is expected to see a number of these policy reversals formally announced by the Chancellor in a bid to regain the confidence of financial markets with a statement to the House of Commons expected at 15:30BST.
Ahead today, there are no UK releases due although later this week September inflation and retail sales reports alongside the latest read on UK consumer confidence (GfK) will provide useful updates. For today, a number of ECB officials – in the shape of Guindos, Nagel and Lane – are set to speak. Markets will be looking for further clues on the size of the interest rate increase expected at its upcoming policy meeting. Despite signs of economic weakness, ECB officials overall have remained hawkish and shown a determination to bring inflation down, which rose to 10.0%y/y in September.
In the US, the day is also void of any major economic data releases. However, the regional Empire manufacturing survey report for October is expected to show a further decline in its headline balance, a sign that activity has continued to moderate in response to a broad flatlining in new orders growth.
Overnight, meanwhile, the Q3 GDP and September industrial production and retail sales reports for China, will possibly be the most important pieces of data from a global perspective this week, given concerns that growth there is continuing to disappoint.
The US dollar has eased back a little overnight, supporting modest rebounds in other G-10 currencies. The pound has started the week slightly stronger with GBP/USD pushing back up above the 1.12 mark, with some support likely having come from growing signs of fiscal prudence.
Asian equity markets surged higher, following the rally on Wall Street which occurred despite stronger-than-expected US inflation data and prospects of even more monetary policy tightening. US headline CPI fell less than expected and remained high at 8.2%, while core inflation accelerated to a four-decade high of 6.6%. The Nikkei overnight was up over 3% and stocks in the Asia-Pacific region overall were up more than 2%. Futures markets suggest European equity indices are poised to open up this morning.
Much of the spotlight remains on UK markets (and politics). The BoE has stepped up gilt purchases this week and extended its buying to include index-linked gilts. Those purchases, however, are due to end today. Meanwhile, the media yesterday reported rumours that options to amend the mini-budget were being assessed in London, including changes to the pledge on corporation tax, while Chancellor Kwarteng was attending the annual IMF meetings in Washington DC. The Chancellor has reportedly cut short his visit and is returning to the UK.
US retail sales data and the University of Michigan consumer sentiment survey will be the main economic data releases today. Yesterday’s figures showed another fall in US headline CPI inflation, led by gasoline prices which in turn has provided support to consumer sentiment in recent months although confidence still remains low by historical standards. We have pencilled a modest rise in consumer sentiment to 59.0 from 58.6. We also expect stronger retail sales, with the underlying ‘control group’ measure forecast to rise by 0.5%.
A key focus for the University of Michigan survey is its measure of consumers’ inflation expectations. Year ahead inflation expectations remain high but have edged lower in recent months to 4.7%. The 5-10 year inflation expectations measure also moved down to 2.7%, the lowest this year. If inflation expectations remain well anchored, it would support the eventual easing of the pace of Fed rate hikes. For now, markets are fully priced for another 75bp rise in early November.
Gilt yields fell yesterday, with the 30-year gilt yield falling 27bp to 4.55% at the close and the 10-year yield 24bp lower at 4.20%. The pound had risen above $1.13 and briefly topped €1.16, although it is a little softer against the euro overnight.
Asian equity markets are mostly down ahead of today’s US CPI report. Last night, the FOMC minutes release reaffirmed the Fed’s focus on getting inflation down, saying that “taking too little action… likely outweighed the cost of taking too much action”. The minutes, however, also noted the need to “recalibrate the pace” of tightening, a hint that the pace of hikes will eventually ease. In the UK, the net balance of respondents expecting higher house prices in the RICS survey fell to 32% in September from 51%, the lowest for over two years.
Sterling markets remain the centre of attention, with UK 30 year gilt yields rising temporarily back above 5% yesterday for the first time since the BoE began its temporary gilt market intervention two weeks ago. The BoE has insisted that temporary purchases will end this Friday as planned. In the meantime, markets are awaiting the Chancellor’s fiscal plan and OBR forecasts at the end of the month to see how the pledge to reduce debt as a share of GDP in the coming years will be met.
This afternoon’s US CPI inflation figures for September will be the focus from a global perspective. Headline CPI inflation has fallen back in the past two months, led by lower gasoline prices, but it remained high at 8.3% in August. We expect gasoline prices to lead headline inflation to fall again to 8.0%. The picture for core CPI appears to be less comforting, as rent inflation is expected to remain high for a period ahead and higher wage growth is also leading to a broader pickup in inflation. We expect core inflation, excluding food and energy, to move up to 6.6% which would be a new four-decade high surpassing the high of 6.5% earlier this year.
Financial markets remained almost fully priced for the Fed to raise interest rates by 75bp again (to 4%) at their next meeting which ends on 2 November, but they anticipate the pace of tightening to start to ease thereafter.
UK 10-year gilt yields reached levels that were last seen in 2008, peaking above 4.6% before falling back to 4.44% which was little changed on the day. The pound dipped briefly below $1.10 and €1.13 but has since pared losses. The BoE has stepped up purchases of nominal and index-linked gilts this week but, as noted above, has reaffirmed that its intervention will end on Friday.
There has been a partial recovery in risk sentiment in the Asian trading session, partly attributed to media reports (FT) overnight that the BoE signalled privately that its temporary gilt purchases may be extended beyond this week if market volatility remains high. Officially, however, the emergency purchases are due to end on Friday, with Governor Bailey commenting late yesterday that the pension sector has “three days left” to resolve issues. The Bank’s actions to preserve financial stability notably contrasts with its desire to tighten monetary policy to tackle high inflation.
The spotlight remains on UK markets after gilt yields continued to rise yesterday despite the BoE signalling its willingness to widen purchases to index-linked gilts and despite it announcing a new facility to provide liquidity (via banks) to LDI funds. Yesterday’s labour data showed some signs of cooling, but the labour market remains tight and further rises in Bank Rate are warranted even though figures this morning revealed a 0.3%m/m fall in August GDP, adding to the likelihood of the economy contracting in Q3.
The focus in the day ahead involves several BoE MPC speakers, including a speech by Chief Economist Huw Pill at 12:35BST. Pill has previously indicated that the government’s fiscal loosening will prompt a “significant and necessary monetary policy response”. External MPC members, Jonathan Haskel and Catherine Mann, will also speak at separate events. Both Haskel and Mann voted for a 75bp rate rise at the last meeting, compared with the majority vote for a 50bp increase to 2.25%. The BoE’s Financial Policy Committee (FPC) summary and record will also be published this morning and will be parsed in light of the recent volatility in financial markets and increases in borrowing rates in the wider economy.
Globally, this evening’s FOMC minutes from the US will be closely watched. Fed policymakers remain hawkish, and the minutes will principally be watched for clues on how much further interest rates are likely to rise (the Fed’s dot plot suggests another 150bp in total), including what to expect for the update on 2 November. Markets have almost priced in another 75bp increase for the next meeting.
In Europe, ECB President Christine Lagarde is due to speak at an event, although the topic of discussion appears to be on sustainability rather than monetary policy. There are upside risks for Eurozone industrial production forecasts.
The pound fell below $1.10 for the first time this month after BoE Governor’s remarks that its emergency gilt purchases will end on Friday. The currency pared some losses after the FT reported that BoE purchases may yet be prolonged. UK 30-year gilt yields yesterday ended higher for a seventh trading day at 4.80%, the highest since the BoE’s temporary intervention in the gilt market began nearly two weeks ago.
Most Asian equity markets are down sharply this morning. Concerns about global growth and a possible escalation in the Russia-Ukraine conflict have been cited as reasons. The IMF and World Bank yesterday warned of the growing risk of a global recession. The IMF’s Managing Director said that while the US labour market is still strong it is losing momentum. The British Retail Consortium estimated that retail sales rose in September on an annual basis but fell in real terms as inflation impacted on spending.
Just released data for the UK labour market showed that employment fell by 109k in the three months to August. Despite that the unemployment rate edged down to a new low of 3.5%. Moreover, the tight labour market still seems to be lifting wages with the latest data for the three months to August showing earnings excluding bonuses 5.4% higher than a year ago, up from 5.2% previously.
UK parliament returns from recess today and Chancellor of the Exchequer Kwarteng is scheduled to answer questions. Yesterday’s announcement that the timing of the release of the government’s Medium Term Fiscal Plan has been brought forward to 31st October means that he will not face calls to do that today. However, he still seems bound to be asked about what areas of public spending he plans to cut to offset the impact on the public finances of his recently announced measures. The Institute of Fiscal Studies says that he needs cuts of £60bn to stabilise debt as a percentage of GDP by 2026/27.
Bank of England Governor Bailey is also scheduled to speak today. That is part of an international event as the semi-annual IMF/World Bank meetings for senior global policymakers begin and so he may not see it as an appropriate forum to talk in detail about the UK. Nevertheless, markets will be looking for clues on the BoE’s policy intentions. Meanwhile, the IMF will issue an update of its economic forecast and that is likely to show downward revisions to growth expectations across the globe.
The early Wednesday release of August UK GDP data is forecast to show a monthly fall of 0.1%. Services probably contracted reflecting the impact of strikes and a fall in retail activity, while maintenance in the oil and gas sector may have dragged down industrial production.
Global bond yields rose yesterday with UK gilt yields coming under particular pressure. Ten-year gilt yields touched above 4.50% for the first time since the BoE’s announcement that it would temporarily buy gilts. That programme has now been extended to index-linked gilts, but it is still set to end after Friday. In currency markets the US dollar has continued to rise overnight and sterling has touched below 1.10 versus the greenback.
The start of the week has seen equities tumbled across the Far East as concerns over rising interest rates and recessionary fears weigh on risk sentiment. In China, reports of a rebound in Covid cases have added to the downbeat tone set by the drop in the Caixin services PMI below 50 in September, reported early on Saturday.
Meanwhile, the Bank of England announced additional measures this morning to support ‘market functioning’. For the remaining five auctions of its temporary long-dated UK government bond buying programme, the Bank will increase the maximum size of each from £5bn up to £10bn, with each day’s limit set daily at 9am. Alongside which, the Bank has also launched a Temporary Expanded Collateral Repo Facility, which will run beyond this week and facilitate commercial banks to help ease liquidity pressures for LDI funds
Despite some soft economic data in the US – including the ISM manufacturing survey, construction spending and job openings – the Fed has shown little sign of swaying from its intention to rates further. Data last Friday showed the US economy added a further 263k jobs in September while the unemployment rate fell back to 3.5% from 3.7%, and are likely to keep Fed members in a hawkish mood and the FOMC minutes later this week will principally be watched for clues on how much further interest rates are likely to rise (the dot plot suggests another 150bp in total), including what to expect for the update on 2 November. Markets have almost priced in another 75bp increase for the next meeting. The US bond market is closed today for Columbus Day holiday and there are no major data releases due in the US. However, Fed members Evans and Brainard are set to speak at the NABE conference in Chicago.
There is a noticeable lack of key economic data releases in the UK and Eurozone too, leaving today’s focus across Europe on ECB speakers Centeno, de Cos and Lane. With Eurozone CPI inflation at 10.0% in September, the ECB is set to continue raising interest rates in upcoming meetings, including the possibility of another 75bp hike on 27 October, despite business survey evidence pointing to a loss of economic momentum and the possibility of contraction in Q3.
Against the current backdrop of elevated inflation, rising central bank policy interest rates and slowing economic growth momentum, the IMF/World Bank joint meeting kicks off in Washington, running through to Sunday (16th). IMF forecast updates are due tomorrow.
Early tomorrow morning, the ONS will publish its latest UK labour market statistics report. Recent monthly figures have pointed to some weakening in employment. Nevertheless, the indications are that the labour market remains tight, with unfilled vacancies still high and the unemployment rate falling to a 48-year low of 3.6%, led by more people becoming inactive, due in part to a rise in long-term illness. We forecast a fall in employment of 200k on a 3m/3m basis and for the unemployment rate to hold at 3.6%.
The US dollar remains on the front foot, which has pushed GBP/USD back below 1.10. Front-month Brent crude oil prices are also trading close to $100 p/b following OPEC’s decision last week to cut oil production.
/*! elementor – v3.7.7 – 20-09-2022 */ .elementor-heading-title{padding:0;margin:0;line-height:1}.elementor-widget-heading .elementor-heading-title[class*=elementor-size-]>a{color:inherit;font-size:inherit;line-height:inherit}.elementor-widget-heading .elementor-heading-title.elementor-size-small{font-size:15px}.elementor-widget-heading .elementor-heading-title.elementor-size-medium{font-size:19px}.elementor-widget-heading .elementor-heading-title.elementor-size-large{font-size:29px}.elementor-widget-heading .elementor-heading-title.elementor-size-xl{font-size:39px}.elementor-widget-heading .elementor-heading-title.elementor-size-xxl{font-size:59px}OVERNIGHT Asian equity markets are down this morning after declines in US and European markets yesterday. Reports suggest that continued hawkish comments from US Federal Reserve officials …
Asian equity markets are mostly positive despite the negative close in US stocks last night and hawkish Fed comments confirming significant further hikes in interest rates are likely, while also playing down the prospect of rate cuts in 2023. Oil prices, meanwhile, rose after OPEC+ decided to cut back production, which could add to inflation in the short term but may ultimately reduce demand. More upbeat risk sentiment has weighed on the US dollar overnight.
The BoE’s latest Decision Maker Panel (DMP) survey of businesses will attract some attention this morning. Last month’s DMP data showed a further increase in 3-year ahead inflation expectations, which are closely monitored by policymakers at the BoE, to 4.2% from 4.1%. The September construction PMI survey will also be released this morning and is expected to signal another month below the 50 growth/contraction boundary. This evening, BoE MPC member Haskel is due to speak, although it is not clear if he will touch on monetary policy.
In the Eurozone, the ‘account’ (minutes) of the ECB’s September meeting will be published today. That was the meeting when interest rates were raised by a record 75bp to 0.75% for the deposit rate and 1.25% for the main refinancing rate. As future policy decisions will be data-dependent and taken on a ‘meeting by meeting’ basis, it is not clear how much additional signals in their likely path for interest rates there will be. Nevertheless, with Eurozone inflation continuing to accelerate, President Lagarde has indicated that more hikes are to be expected in the remaining two policy meetings this year and possibly in early 2023 and that the ECB is frontloading hikes. Hence, another 75bp hike in October cannot be ruled out.
There are several scheduled Fed speakers later today, including Governors Cook and Waller and Cleveland Fed President Mester (voter). The most recent US economic data exhibited some softness, leading to some pullback in markets for hike expectations in 2023.
The pound overnight recouped some of yesterday’s falls, trading back above $1.13, while the euro has edged above $0.99. UK gilts underperformed, with 10-year yields rising 16bp to 4.035% and 30-year yields up 17bp to 4.20%, the latter being the highest since the BoE’s began temporary purchases. Brent crude oil was steady overnight after rising for a third session yesterday to above $93 a barrel.
