Over the weekend China authorities reaffirmed a commitment to their zero Covid policy stance. This follows the recent increase in the reported number of infections, which on Sunday rose to the highest level since May. Latest economic data for China showed a smaller-than-expected rise in the country’s trade surplus as weak global demand weighed on exports. Nevertheless, market risk sentiment has started the week on a positive note with almost all major equity indices positive across the Asia-Pacific region.
Both the Bank of England and the US Federal Reserve raised interest rates by three-quarters of one percent last week to 3% and a 3.75%-4.00% range, respectively, in line with expectations. There was, however, noticeable differences in the two central banks’ guidance on future policy. Although the Fed indicated that the pace of hikes could slow from next month, Chair Powell declared that peak interest rates would have to go higher than previously thought in order to tackle inflation. The Bank of England, in contrast, executed a ‘dovish’ hike by signalling that it believes the terminal rate for Bank Rate in 2023 will be lower than markets currently expect. That was backed up by a downbeat economic assessment in its updated forecasts showing quarterly contractions in output to at least the end of 2023. Moreover, the forecasts do not take account of the difficult decisions on fiscal policy that will be announced in the forthcoming Autumn Statement scheduled for 17 November, which might further dampen the near-term growth outlook.
Over the coming week, a number of members from both central banks are set to speak in the coming week, which will be watched closely for further clues on the respective policy outlooks. For today, the focus will be on Fed policymakers Mester, Collins and Barkin who are set to speak at events over the course of the day. Elsewhere, the day is void of any major data releases, with only the Eurozone Sentix investor confidence survey due. ECB President Lagarde is due to release a pre-recorded video this morning on the topic of ‘Towards a legislative framework enabling a digital euro for citizens and businesses’, suggesting that the prospect of comments on monetary policy are low. The ECB’s Panetta is also due to speak.
Having fallen sharply on Friday, the US dollar has regained some of its poise this morning but still remains down relative to where it was before last week’s ‘hawkish’ Fed policy update. GBP/USD continues to trade above 1.13, while EUR/USD remains just below the parity mark. US 10-yr Treasury yields have nudged up further overnight and continue to trade well above their UK equivalents.
