October 27, 2022 8:10:51
Risk sentiment continued to ebb and flow as global equity markets were weighed down by disappointing earnings from key tech companies but supported by the prospect of eventual policy ‘pivots’ from central banks around the world. Following the BoC raising its policy rate by ‘just’ 50bps (vs. expectations of 75bps), RBNZ Governor Orr suggested in a speech overnight that the RBNZ was “well down the path of where they needed to be”, raising questions as to whether the RBNZ may be next to slow its rate of tightening.
Having been reappointed Chancellor by new UK Prime Minister Rishi Sunak, Jeremy Hunt yesterday announced that the keenly awaited fiscal statement and update from the Office for Budgetary Responsibility, previously due 31 October, had been re-scheduled to 17 November and “upgraded to a full autumn statement”.
In his first speech as Prime Minister earlier this week, Sunak suggested he would place economic stability at the heart of his agenda. The autumn statement will be the first test of this. He and the Chancellor now have three weeks to finalise the fiscal policy course to be pursued to better balance the UK’s finances over the medium term.
Away from UK political and economic developments, the focus today will be on the ECB’s policy update. Despite clear signs of a slowdown in the Eurozone economy – evident in our latest UK Sector Tracker, here – a further 75bp increase in all policy interest rates would appear likely. Most economists anticipate, and financial markets are almost ‘fully priced’ for, such an outcome. This would leave the deposit rate at 1.50% (from 0.75%), refinancing rate at 2% (from 1.25%) and marginal lending rate at 2.25% (from 1.50%). By further tightening policy, the Governing Council would be showing its commitment to getting inflation down and reducing the risk of ‘second-round effects’ taking hold.
ECB President Lagarde’s press conference will also be carefully listened to. She may be posed questions on the possible timing of quantitative tightening and her expectations of what the terminal rate of interest might be.
Elsewhere, the latest US GDP report is due to be released. Having contracted in Q1 and Q2, the US economy is expected to have expanded by 2.0% (annualised) in Q3, despite the slowdown in the housing market. Output will likely be helped by stronger consumer spending (supported by lower oil prices), positive business investment and a positive contribution from net trade.
UK government bond yields continued to trend lower yesterday. Two-year gilt yields fell below 3.30%, a level not seen since before the BoE meeting in September, in which the MPC raised Bank rate by 50bps. Fuelled by speculation of a Fed ‘pivot’ and amidst a broad US dollar sell off, the EUR rose above parity for the first time since 20 September. The GBP also rallied, settling above 1.16, its highest level in over six weeks.
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