October 13, 2022 8:14:18
Asian equity markets are mostly down ahead of today’s US CPI report. Last night, the FOMC minutes release reaffirmed the Fed’s focus on getting inflation down, saying that “taking too little action… likely outweighed the cost of taking too much action”. The minutes, however, also noted the need to “recalibrate the pace” of tightening, a hint that the pace of hikes will eventually ease. In the UK, the net balance of respondents expecting higher house prices in the RICS survey fell to 32% in September from 51%, the lowest for over two years.
Sterling markets remain the centre of attention, with UK 30 year gilt yields rising temporarily back above 5% yesterday for the first time since the BoE began its temporary gilt market intervention two weeks ago. The BoE has insisted that temporary purchases will end this Friday as planned. In the meantime, markets are awaiting the Chancellor’s fiscal plan and OBR forecasts at the end of the month to see how the pledge to reduce debt as a share of GDP in the coming years will be met.
This afternoon’s US CPI inflation figures for September will be the focus from a global perspective. Headline CPI inflation has fallen back in the past two months, led by lower gasoline prices, but it remained high at 8.3% in August. We expect gasoline prices to lead headline inflation to fall again to 8.0%. The picture for core CPI appears to be less comforting, as rent inflation is expected to remain high for a period ahead and higher wage growth is also leading to a broader pickup in inflation. We expect core inflation, excluding food and energy, to move up to 6.6% which would be a new four-decade high surpassing the high of 6.5% earlier this year.
Financial markets remained almost fully priced for the Fed to raise interest rates by 75bp again (to 4%) at their next meeting which ends on 2 November, but they anticipate the pace of tightening to start to ease thereafter.
UK 10-year gilt yields reached levels that were last seen in 2008, peaking above 4.6% before falling back to 4.44% which was little changed on the day. The pound dipped briefly below $1.10 and €1.13 but has since pared losses. The BoE has stepped up purchases of nominal and index-linked gilts this week but, as noted above, has reaffirmed that its intervention will end on Friday.
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