October 14, 2022 7:31:12
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.
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