October 26, 2022 7:18:28
Asian equity markets are generally higher this morning following on from a decent gain in the US market yesterday. Reports suggest that markets were boosted by hopes that the US central bank will soon start to slow the pace of its interest rate increases. However, disappointing earnings reports from several tech companies seem to be having a negative impact on US futures prices. In Australia Q3 annual CPI inflation rose by 7.3%y/y, higher than expected and up from 6.1%y/y in Q2.
With the identity of the next UK Prime Minister now decided financial market attention will turn to other matters. However, today seems set to be a very quiet day for UK economic news. There are no UK economic data releases of note and no immediate news on policy is expected. Markets are keenly awaiting next Monday’s statement on fiscal policy, if it still goes ahead as planned, and next Thursday’s Bank of England monetary policy update. But BoE policymakers are now in their pre-announcement silent period, so we are unlikely to learn anything more about the Bank’s plans today. Moreover, while rumours may circulate about fiscal policy it seems unlikely that we will learn anything of substance today.
The probable lack of domestic news means that the focus today may be on international developments. Here too markets are really in wait-and-see mode ahead of the policy updates from the European Central Bank tomorrow and the US Federal Reserve next week. However, ahead of that today’s announcement from the Bank of Canada will provide further evidence on the international interest rate outlook.
The BoC has raised interest rates by 300 basis points in total this year including hikes of 100bp and 75bp respectively at the last two meetings. There has been some talk that the BoC may slow the pace of hikes this time and an increase of ‘only’ 50bp seem to be a possibility, although markets are still expecting another 75bp move. Equally important will be what the BoC signals for its future intentions as the size of any further moves is expected to be much smaller. However, as is the case with most central banks around the world the BoC faces a difficult balancing act between growing downside growth risks and elevated inflationary pressures.
Today’s data calendar seems unlikely to have much impact on markets. European money supply data is expected to show annual growth of 5.9% in September. That’s down from 12% in early 2021 but the deceleration during 2022 has so far been more modest and seems unlikely to deter the ECB from raising interest rates. In the US, September new home sales are forecast to fall, while the advanced trade deficit may be little changed from August.
UK gilt yields dropped further yesterday, while bond yields in other international markets also declined. Ten-year gilt yields are down by more than 40bp from last Friday’s close, while US Treasury yields are about 15bp lower. In currency markets sterling is close to 1.15 against a generally weaker US dollar and is also up more modestly against the euro.
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