October 12, 2022 7:27:23
There has been a partial recovery in risk sentiment in the Asian trading session, partly attributed to media reports (FT) overnight that the BoE signalled privately that its temporary gilt purchases may be extended beyond this week if market volatility remains high. Officially, however, the emergency purchases are due to end on Friday, with Governor Bailey commenting late yesterday that the pension sector has “three days left” to resolve issues. The Bank’s actions to preserve financial stability notably contrasts with its desire to tighten monetary policy to tackle high inflation.
The spotlight remains on UK markets after gilt yields continued to rise yesterday despite the BoE signalling its willingness to widen purchases to index-linked gilts and despite it announcing a new facility to provide liquidity (via banks) to LDI funds. Yesterday’s labour data showed some signs of cooling, but the labour market remains tight and further rises in Bank Rate are warranted even though figures this morning revealed a 0.3%m/m fall in August GDP, adding to the likelihood of the economy contracting in Q3.
The focus in the day ahead involves several BoE MPC speakers, including a speech by Chief Economist Huw Pill at 12:35BST. Pill has previously indicated that the government’s fiscal loosening will prompt a “significant and necessary monetary policy response”. External MPC members, Jonathan Haskel and Catherine Mann, will also speak at separate events. Both Haskel and Mann voted for a 75bp rate rise at the last meeting, compared with the majority vote for a 50bp increase to 2.25%. The BoE’s Financial Policy Committee (FPC) summary and record will also be published this morning and will be parsed in light of the recent volatility in financial markets and increases in borrowing rates in the wider economy.
Globally, this evening’s FOMC minutes from the US will be closely watched. Fed policymakers remain hawkish, and the minutes will principally be watched for clues on how much further interest rates are likely to rise (the Fed’s dot plot suggests another 150bp in total), including what to expect for the update on 2 November. Markets have almost priced in another 75bp increase for the next meeting.
In Europe, ECB President Christine Lagarde is due to speak at an event, although the topic of discussion appears to be on sustainability rather than monetary policy. There are upside risks for Eurozone industrial production forecasts.
The pound fell below $1.10 for the first time this month after BoE Governor’s remarks that its emergency gilt purchases will end on Friday. The currency pared some losses after the FT reported that BoE purchases may yet be prolonged. UK 30-year gilt yields yesterday ended higher for a seventh trading day at 4.80%, the highest since the BoE’s temporary intervention in the gilt market began nearly two weeks ago.
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