Business research

Markets Today: Don’t Panic, Mr. Bailey

Bailey in Washington says bond purchases will end on schedule on Friday

By

Podcast of the day

Overview: should I stay or should I go?

  • Bailey in Washington says bond purchases will end on schedule on Friday
  • Erase the reversal in risk sentiment earlier in the US session
  • S&P 500 erases prior gains, DXY +0.1%
  • GBP -0.7% to 0.6980
  • Coming soon: RBA’s Ellis, FOMC minutes, ECB’s Lagarde

“Should I stay or should I leave now?”
If I leave, there will be problems
And if I stay, it will be double
So come on and let me know” – The Clash

It’s a third-party story in the last 24 hours. Yesterday’s risk aversion extended into the Asian session before US equities rallied and the USD reversed earlier gains overnight. That was until Bailey’s tough talks over the past two hours saw this recovery reverse. All in all, the dollar is a little higher, US 10-year yields are up 5bps to 3.93% and equities are down. The BoE has been in the driver’s seat, with the earlier announcement of another market intervention to protect financial stability and help calm bond markets, before Governor Bailey’s warning that pension funds had no no longer “three days” renewed the tone of risk.

The Bank of England and the UK gilt market have once again been in focus over the past 24 hours. The Bank of England has extended its support for pension funds for the second day in a row, this time offering to buy up to £5bn a day of inflation-linked government bonds, on the expanded daily envelope of £10 billion announced the day before. The Bank warned that “the prospect of a self-perpetuating ‘fire-selling’ dynamic poses a significant risk to the UK’s financial stability. “It was the first time the BoE bought inflation-linked debt. On that day, the BoE only bought £1.95bn of inflation-linked gilts and £1.35bn of gilts. Speaking in Washington in the afternoon in the United States, Governor Bailey dampened hopes that the BoE could have a longer presence in the markets. He told the pension funds “You have three days left… You have to do it.” To say that the window for action would end well on October 14 and that the intervention in the markets is temporary. The Chancellor is expected to reveal her borrowing plans on October 31.

Giving no respite to the Bank of England in its fight against inflation, UK employment data suggests still-robust labor market despite headwinds weighing on the outlook. Payroll employees rose by 69,000 in September, beating the expected gain of 35,000, while the 3-month unemployment rate fell to 3.5%, the lowest since 1974.
Yields on the 10-year gilts fell 3 bps to 4.44%, although the yield on the 30-year gilts rose 12 bps to 4.79%. The US 10-year yield was trading above 4.0% at the end of local trading yesterday, but fell back to close around 3.93%, well above the intraday yield low of 3.87%.

In foreign currency, the DXY initially extended strength, appreciating to 113.50 in Asia, before falling back to 112.40 alongside the broader improvement in risk assets, but fell back sharply to near the day’s highs following to Bailey’s comments, and is now around 113.26, up 0.1% on the day. Within the G10, declines over the past 24 hours have been led by the Scandinavian currencies and the pound. The GBP was down 0.6%. The AUD also underperformed. The currency hit a fresh 2-year low at 0.6248 in Asian trading, rallied to an intraday high of 0.6346, before falling sharply back around 0.6276. The NZD held up better, gaining 0.4% against the USD, and seeing the AUD fall 0.8% against the Kiwi at 1.1224. The yen was little changed against the dollar, down 0.1% to 145.85. Japanese Prime Minister Kishida said in an interview with the FT that he fully supports the BoJ’s ultra-dovish policy stance and that policy should remain flexible until wages rise.

In equity markets, US stocks fell following Bailey’s comments. The S&P500 was up about 0.8%, but reversed a rally to fall about 0.6%. The Nasdaq is down 1.1%, taking the index back into a bear market, more than 20% below its recent high. US inflation data on Thursday will be the next big data printout for US markets. Equities in Asia fell, the Nikkei lost 2.6% and the Hang Seng 2.2%. the Euro Stoxx 50 was down 0.5%.

In other business news, and with most headlines already revealed in the press, the IMF has cut its forecast for global growth. Growth next year was reduced to 2.7% from 2.9%, after growing 3.2% this year, while inflation was revised up to 8.8% this year and to 6.5% next year. The IMF said risks to the outlook remained “unusually large and to the downside”, with a 25% chance of global growth falling to 2.0%, the 10th percentile of global growth outcomes since 1970.

In the Australian data stream yesterday, the NAB Business Survey strengthened further in September . Conditions rose 3 points to 25, more than the pre-COVID peak and were only surpassed by the post-lockdown surge in early 2021. Business conditions drove the increase, rising 9 points to + 38, while profitability (+16) and employment (+16) changed little. Confidence fell 5 points around its long-term average. Westpac-Melbourne Institute consumer confidence fell 0.9% m/m in October to 83.7, remaining near all-time lows. Respondents polled after the RBA downgraded to the pace of the increases backed the reading, with much stronger sentiment than those polled before the meeting.

Coming

  • RBA Deputy Governor (Economic) Ellis speaks in Sydney at 9:00 a.m. on ‘The Neutral Rate: The North Star Emits Faint Light’. The RBA has previously set a nominal neutral at at least 2.5%. The speech could prove to be a timely update on RBA thinking, although the title suggests Ellis may play down the role of “neutral” in guiding policy.
  • On the data calendar are monthly UK GDP, Eurozone industrial production and US PPI
  • FOMC minutes for September meeting released
  • ECB Lagarde headlined by Central Bank speakers

Market price

NAB Markets Research Disclaimer