October 19, 2022 7:24:22
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.
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