October 21, 2022 7:38:51
Asian equity markets were under selling pressure following the negative end to the US trading session. US Treasury yields rose further, with Fed officials’ comments remaining hawkish. Philadelphia Fed President Harker said that policy rates will rise well above 4% by the end of 2022, while Fed Governor Cook said rates are likely to remain restrictive for some time.
UK economic data released earlier today revealed a sharper-than-expected drop in September retail sales of 1.4%m/m on the back of a 1.7%m/m decline in August. Retail sales were dragged lower by rising prices as well as the impact of the extra bank holiday for the Queen’s state funeral. GfK Consumer Confidence, however, surprisingly rose by 2 points, but remained weak at -47 in October. The climate for major purchases index slipped to -41 in October, from -38 in September. Finally, public sector net borrowing was larger than expected in September at £20.0bn, up from £17.8bn last September.
UK focus is squarely on domestic politics after PM Truss’s resignation yesterday. A new party leader and PM will be installed by next Friday at the latest in a fast-tracked process. Under new rules, candidates need the backing of at least¬ 100/357 Conservative MPs on Monday. That suggests there will be no more than three candidates. It is possible only one candidate gets 100 nominations in which case that person will automatically become leader. A new procedure in the situation of two remaining candidates proposes that Conservative MPs will provide an ‘indicative vote’ of their preference before the Conservative membership (~172K) choose the winner (a bit like the BBC’s Strictly Come Dancing programme?).
Elsewhere, there are only second-tier economic data releases today. Canadian August retail sales and October Eurozone consumer confidence later today will attract limited attention. A new low in Eurozone consumer confidence is expected. Despite that, ECB policymakers remain focused on bringing inflation down and are expected to raise interest rates next week, potentially by 75bp for a second successive meeting.
The pound weakened in reaction to the UK retail sales data as well as domestic political uncertainty, falling below $1.12 and also weakening against the euro. UK 30-year gilt yields fell again yesterday, but whoever becomes the next PM, markets will look for reassurance that Chancellor Hunt’s fiscal plan on 31 October remains on track.
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