October 20, 2022 7:22:38
Global financial markets remained volatile and Asian equity markets were under pressure overnight despite some recent positive corporate earnings announcements. Dampening risk sentiment were US Treasury yields reaching new multi-year highs on expectations of further Fed policy tightening. Remarks from the US central bank for the interest rate outlook, especially in the near term, remained hawkish.
There are no major UK data releases today, but BoE deputy governor Ben Broadbent will give a speech this morning on “the inflationary consequences of real shocks”. The gilt market has so far remained relatively calm after the reversal of most of the government’s mini-budget by the new Chancellor, while investors await details of further tax and spending measures on 31 October. The BoE has confirmed it will start active gilt sales (QT) on 1 November, focused initially on short- and medium-term maturities. The Bank will announce its interest rate decision on 3 November and is currently expected by markets to raise them by at least 75bp to 3%.
There will be UK data releases early Friday, including the GfK consumer confidence measure and retail sales. The latest monthly public finance figures will also be released early tomorrow ahead of the Chancellor’s 31 October fiscal plan. Consumer confidence fell to an all-time low in September despite the announcement of the energy subsidy. Given the news over the past few weeks, particularly the concerns expressed about rising mortgage rates, it would be no surprise if it has fallen again in October. We forecast a new low of -52 from -49 in September.
Despite the ongoing weakness in sentiment, we think it is probable that UK retail sales may have risen modestly by 0.4%m/m in September after a big fall in August. Nevertheless, the underlying trend for sales volumes remains weak, given various headwinds including from rising prices. There is additional uncertainty to the data and a possible downside risk to our forecast with the potential impact of the extra bank holiday for the Queen’s funeral.
The US data focus today includes the regional Philadelphia Fed manufacturing survey, existing home sales and the usual weekly jobless claims on a Thursday. The data are unlikely to change the Fed’s focus on getting inflation down, with recent Fed comments remaining hawkish. Several Fed speakers are scheduled today, including Philadelphia Fed President Harker discussing the economic outlook.
UK gilt yields continued to fall yesterday, with the 30-year yield closing at 3.99%, below 4% for the first time in more than two weeks. The 10-year gilt yield was down 7bp at 3.88%. Since the UK close, however, US Treasury yields have climbed. In FX, the pound has fallen towards $1.12, although it appears more to do with dollar strength than the domestic political situation.
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