October 24, 2022 7:28:46
Market volatility remained at the start of the week, with Asian equities mixed overnight. Despite the Chinese economy growing faster than expected at +3.9%q/q in the third quarter, Chinese equities were trading lower following President Xi’s defence of the country’s zero Covid policy and his taking further steps to centralise control ahead of his third 10-year term.
The political situation in the UK has been a key focal point for financial markets of late and today is likely to be no exception. Conservative party MPs are expected to vote on the two leadership candidates this afternoon, Rishi Sunak and Penny Mordaunt. If both have the backing of 100 MPs, the threshold set to secure their place on the ballot, Conservative MPs will hold an indicative vote before the party membership have the final say for the second time in as many months. However, if one candidate withdraws, who is the Conservative Party leader and so new PM will be known today. There has been some speculation that the suggested planned fiscal budget on the 31st of October may be delayed if there is indeed a contested vote.
Ahead today, October ‘flash’ PMIs will be the data highlight at the start of week. They are expected to reaffirm challenging economic conditions at the start of Q4 as businesses face weakening demand and increasing economic uncertainty. We expect the UK manufacturing PMI to fall to 48.0, below the 50 no-growth threshold, and the services PMI to signal near stagnation at 50.3. In the US, markets expect manufacturing to hold up better (51.0) than services (49.6).
For the Eurozone, we forecast the manufacturing PMI to drop to 47.5 and the services PMI to fall to 48.0. These outturns would support consensus forecasts for negative Q4 GDP growth. However, the loss of economic momentum is unlikely to deter the ECB at its next policy update on Thursday as rate-setters’ focus remains on containing inflation and preventing second round effects. On Thursday, the ECB are expected increase all its interest rates by 75bp for a second successive policy meeting, taking their deposit rate to 1.5% (from 0.75%).
GBP rose overnight following Boris Johnson’s decision to not bid for the Conservative Party Leadership. Elsewhere, the Japanese yen has been turbulent, trading between 145.5 and 149.5 against the US dollar, amid the possibility of further intervention of the currency by the Bank of Japan.
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