October 18, 2022 7:14:56
A recovery in risk appetite has pushed equities higher across Asia, despite ongoing concerns over the health of China’s economy, particularly after it delayed the release of its Q3 GDP report. Sentiment has been further bolstered by reports that the Bank of England is set to delay quantitative tightening (QT). With recent UK fiscal events having generated significant volatility in bond markets, the move has been seen as a positive attempt to bring about some stability, particularly in the UK gilt market.
Meanwhile, the release of the minutes to the Reserve Bank of Australia’s last policy meeting – where it hiked by a less-than-expected 25bp – showed that the central bank still expected interest rates to rise further. However, it also noted the need to balance the objective of lowering inflation against keeping the economy on an even keel.
Yesterday’s fiscal announcement by the recently appointed UK Chancellor, Jeremy Hunt, saw the government reverse more of the measures announced as part of the previous Chancellor’s mini budget, hot on the heels of last week’s news that the freezing of the rate of corporation tax would also be abandoned. Notably, all but those measures that were already progressing through parliament – the NICs cut and the stamp duty reduction – were dropped. These cuts amount to around £32bn of expected savings by 2026/27, on top of which the Chancellor also confirmed that the Energy Price Guarantee scheme would only continue in its current form until April, after which it would become more targeted. Financial markets responded positively to the announcement with UK government bond yields dropping noticeably on the day. Nevertheless, they remain higher relative to the 23rd September, prior to the previous Chancellor’s fiscal announcement.
Today’s focus is likely to be elsewhere, with no major events or key data releases due in the UK. The German ZEW survey for October is forecast to show further deteriorations in both the future and current expectations components, building on the sharp falls in sentiment seen already this year. Despite signs of economic weakness, ECB officials overall have remained hawkish and shown a determination to bring inflation down, which rose to 10.0%y/y in September and later today we hear from policymaker Schnabel. In the US, the industrial production report for September and the NAHB housing market index report for October are due this afternoon. Meanwhile, Fed members Bostic and Kashkari are due to speak at separate events.
Early tomorrow morning, the latest UK inflation release is likely to prompt some interest. We expect that to show a rise in annual headline CPI inflation to 10.2% in September, a new high for 2022.
Following reports that the Bank of England was likely to delay quantitative tightening, the pound initially strengthened but has given up those gains to trade lower on the day. Nevertheless, GBP/USD and GBP/EUR remain up on the week, following the positive reception given by markets to the UK chancellor’s announcement yesterday.
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