UK markets remain at the epicenter of global market volatility
Podcast of the day
Overview: Gilt Trip
- UK markets remain at the epicenter of global market volatility
- The 30-year gilt yield charts a range nearly 30 basis points, but ends unchanged on the day
- GBP/USD ranged 2 cents, but ended the day in New York as the strongest G10 currency
- USD/JPY Holds Above Previous FX Intervention Levels
- FOMC minutes ‘on the message’ on lingering inflation concerns
- No surprises in the US PPI ahead of any major CPI tonight
Ahead of the all-important US CPI release tonight, UK markets remain at the epicenter of global market volatility, in bonds and currencies if not necessarily equities, US equities ended the day in New York. Little changed at the start of the US third quarter earnings season, after a mostly down day for European equities (UK FTSE -0.9%, Eurostoxx 0 -0.25%). AUD/USD is virtually unchanged from 24 hours ago, but AUD/NZD is down another 0.4% to be, at one point overnight, down around 4% from its recent high near 1.15.
UK market volatility – gilding and sterling, remains exceptional. Following strong words from BoE Governor Bailey on Tuesday night that the UK pensions industry had three days to get its house in order before Friday’s (unchanged) deadline for the spree to end purchase of gilt from the old lady, the FT reported late in our day on Wednesday that the Bank had privately told some institutions that if necessary, purchases would continue until next week if the market malfunctions the demanded – which the BoE denied on Thursday morning as being the case. The reality is inevitable that (any) central bank’s responsibility for financial stability will ultimately outweigh its broader macroeconomic (anti-inflation) mandate, so the Bank will necessarily be there if market conditions require it (not that, in this case, it means that the Bank would be prepared to maintain a ceiling on gilt returns, far from it in fact insofar as this directly conflicts with its anti-inflationary objectives).
In the mix of market volatility, our UK colleagues note various apparently well-researched media reports delving into the likely next reversals in fiscal policy by the Truss government – commensurate with events in the financial markets and the deterioration of the UK’s position given the barely comprehensible political decisions of recent weeks. This includes speculation about pushing back the 1p cut in the basic tax rate (to 19p) to its original date of 2024 – but keeping the (now ambitious) narrative of wanting to cut taxes. There is also talk of pushing back on plans for no corporate tax increases – with suggestions some tax increases will happen, but they will be staggered. Overall, UK media say the sheer market turmoil, rising interest rates and the need for fiscal prudence are finally being factored in. Additionally, Treasury staff would review the entire mini (max?) budget to see what can be unchecked, that everything is reviewed, and that “the Prime Minister is panicking” according to a quoted Whitehall official.
The result (so far) of all this is that Yields on 30-year gilts fell from Tuesday’s closing level of 4.80% to 5.10% (compared to their September 28 peak of 5.14%) before falling back to 4.78%. The latest move was helped by news that the BoE had bought £4.4bn worth of gilts from investors, its biggest intervention since entering the market last month to prevent “fire selling” by investors. UK pension funds following the government’s announced plans for tax cuts. financed by issuing public debt.
Elsewhere in the bond market, Treasury yields are 2-4 basis points lower on the day (see FOMC minutes commentary below) in line with declines seen in most European markets and following the downward retracement of gilt yields.
For currencies, the British pound remained extremely volatile , GBP/USD fell sharply on Wednesday in late New York and early Wellington on BoE’s Bailey’s “three days left” remarks and extended those losses to $1.092 during the APAC day ahead. to rally to 1.1145 over the past few hours – a 2% intra-day range. Currency movements elsewhere were much more muted, although it should be noted that USD/JPY showed no signs of pulling back after yesterday’s rise to below ¥145, so just above the peaks reached on September 22 in front of the BoJ. intervention. Of note here are comments by BoJ Governor Kuroda in Washington, reiterating the BoJ’s continued support for its ultra-loose monetary policy and, while asserting that the government’s foreign exchange intervention was entirely appropriate, noted that the depreciation of the yen to date may have had a “good macro impact”.
Freshly published FOMC Minutes the Fed’s September meeting (when rates were hiked 75 basis points) appear to be responsible for a slight pullback in US Treasury yields and the USD. While the minutes indicate a united and resolute commitment by policy makers in their commitment to fighting inflation, and a view that the cost of doing too little (on policy rates) outweighs that of Overdoing it, there was (at this stage only a minority) view pointing to the importance of calibrating the tightening to mitigate risks to both the economy and financial stability. Nothing here to distract from the Fed’s 75bps next month (74bps price), but also nothing to suggest that current market prices favoring a decline to 50bps in December are out of context.
At the data level, UK monthly GDP data posted a 0.3% m/m contraction in August, putting the UK on track for a negative Q3 result, likely the start of a much-anticipated economic recession. In other key economic news, US PPI inflation offered little respite from high inflation, with a higher than expected headline rate at 0.4% m/m and 8.5% y/y, boosted by rising food prices, while core inflation was broadly in line at 0.3% m/m and 7.2% yoy/y.
Finally, ahead of a string of bank results today and tomorrow, the US earnings season kicked off with a strong result of PepsiCo and improved perspective. The strong result reflects imposed price increases that exceeded costs and this more than offset lower volumes – not good for those worried about “stagflation”, but good for PepsiCo if it has the power to price fixing.
- September CPI in the United States the data is important and should have a major impact on rates, risk sentiment and FX between its release and the weekend. While the headline CPI is expected to fall to 8.1% from 8.3% (0.2% m/m), it is the core reading that should be more influential and where the consensus is 0.4% over the month for 6.5% y/y versus 6.3% in August.
- If the latter were to rise, markets could be forced to rethink their current confidence in the Fed by going up 75 basis points in November and then down to 50 basis points in December (i.e. 75 + 75 falls into the frame), while as expected or even a (small) downside surprise should at least solidify expectations that the Fed will drop to 50bps in December after making 75bps next month – and maybe only a little more after that. That said, we believe markets are better prepared for positive data expectations, having been blindsided by stronger than expected data last month.
- After PepsiCo last night, the US earnings season continues with Goldman Sachs pre-opening tonight, ahead of JP Morgan, Citigroup, Morgan Stanley and Wells Fargo on Friday
- Weekly jobless claims are the other US publication of note, up modestly to 225,000 from 219,000 last week. Nothing to report on the calendar of APAC sessions.