Asian equity market performance is mixed this morning as markets remain unsure about how further global, and in particular, US monetary policy will be tightened. Comments made by US Federal Reserve policymakers yesterday were hawkish. St Louis Fed President Bullard warned that US interest rates may need to rise above 5%, while Minneapolis Fed President Kashkari in reference to the favourable reaction by markets to lower than expected US inflation said that they “cannot be overly persuaded by one month’s data”.
Just released data for UK retail sales October posted a rise of 0.6%, following large declines in the previous two months. It was the first monthly gain since July and only the second this year. Nevertheless, retail sales were still 6.1% lower than a year ago. Moreover, the fundamental drivers of consumer expenditure remain precarious with spending power being squeezed both by high inflation and rising interest rates. The November reading for the GfK consumer confidence measure, released a little earlier this morning, posted a second consecutive small gain. Nevertheless, it is still close to September’s all-time low.
In the US October existing home sales are likely to provide further evidence of the negative impact of higher interest rates on one of the most rate sensitive sectors. Data released yesterday showed housing construction starts post a fall of 4.2% in October and todays outturn for sales is expected to see a decline of 6%, which would be the 9th consecutive slip. The news earlier this week that retail sales rose sharply in October was an indication that some parts of the economy are still growing, and the consensus expectation is that US GDP will rise in Q4 However, weakness in more interest rate sensitive sectors may be seen by markets as an indication that rates are biting and so may not have much further to rise.
Jonathan Haskel, one of the external members of the Bank of England’s Monetary Policy Committee speaks at a conference this afternoon. As he is scheduled to talk about fiscal policy there will be most interest in whether he has anything to say about yesterday’s UK budget update and whether it had any impact on his thinking about how much further UK interest rates are likely to go up. However, it seems more likely that he will avoid comments on the immediate policy outlook. European Central Bank President Lagarde and US Federal Reserve policymaker Collins are also scheduled to talk at conferences.
UK government bond yields rose yesterday. However, most of the upward move occurred before the UK budget update and so may have been more of a response to international uncertainties. Sterling was down modestly on the day against both the US dollar and euro on Thursday. However, it has rebounded overnight as it holds on to most of this week’s gains particularly versus a generally weaker dollar.
