Most Asian equity markets are trading lower this morning despite gains in US and European markets yesterday. Markets may have been negatively impacted by geopolitical tensions following reports that missiles from the Russian-Ukrainian conflict had hit Poland. US President Biden said that the missiles were “unlikely” to have been launched from Russia. Meanwhile, former President Trump has confirmed he will run to be Republican candidate for the 2024 US Presidential election.
Just released data showed a higher-than-expected rise in UK annual CPI inflation in October to 11.1% (from 10.1% in September), while ‘core’ inflation was unchanged at 6.5%. A sizeable rise in inflation had generally been expected primarily because the government’s measures to cap utility prices had not fully offset the recent rise in gas market rates. Higher-than-expected producer price gains also pointed to pipeline inflationary pressures remaining elevated. The UK numbers contrast with recent outturns in the US which have shown evidence that inflation is slowing.
Bank of England Governor Bailey and several colleagues from the Monetary Policy Committee will testify to a House of Commons Committee this afternoon about their recent decision to raise interest rates. Markets will be watching for whether they add to their guidance that rates are likely to rise further albeit by less than markets expect. However, the greatest attention is likely to be on tomorrow’s budget update, its impact on the economy, and whether fiscal tightening may reduce the need for further interest rate increases.
US updates for retail sales and industrial production are forecast to have both risen in October. Some of the most interest rate sensitive sectors, notably housing is seeing a clear negative impact from higher interest rates. However, the economy as whole still seems to be growing and the consensus is that GDP will rise again in Q4.
That appears at odds with the view that there will be an early pivot in monetary policy. Nevertheless, lower than expected October producer price data yesterday provided further support to market expectations that US interest rates may be close to a peak. Those expectations had already been boosted by a downward surprise on CPI inflation last week. Several Fed policymakers have warned against reading too much into the data and said that interest rates have further to rise albeit the pace of increases may now slow. Today’s Fed speakers are likely to provide further support to those comments.
Despite US government bond yields falling sharply yesterday after the downward surprise on the PPI, the move has largely reversed. In currency markets, the prospect of a slower pace of monetary tightening added to the downward pressure on the US dollar with GBPUSD briefly moving above 1.20. Meanwhile, against EUR, sterling is broadly flat.
