The fallout from Britain’s mini-budget continues.
Presentation: I don’t like
- The fallout from Britain’s mini-budget continues
- UK 2-year up another 56 basis points to 4.49%
- US yields up sharply and the dollar stronger
- GBP hits record low of 1.035, now around 1.069
- AUD -1.1% to 0.6457
- S&P500 -1.0% at the lowest close since December 2020
- Coming soon: Fed speakers, BoE pill, US consumer confidence
The UK and the reaction to the new government’s growth plan once again dominated the spotlight to start the new week. The pound hit a record low of 1.035, only managing to regain ground on a further surge in gilt yields and BoE bullish expectations. Global yields have also risen and the dollar is up at least 0.5% against every G10 currency and 0.7% on the DXY. US stocks are down, with the S&P500 losing 1.0% to its lowest close since December 2020.
First in the UK, where after taking the weekend to digest the implications of the UK government’s tax cuts growth plan, markets remain unimpressed. The pound fell to an all-time low of 1.035 in early Asia. That ground returned over the next few hours as rising gilt yields and expectations for BoE action supported the pound, with the currency taking it back a little above Friday’s close to touch as low as a low. given time 1.093. A BoE statement threw cold water on the idea of an emergency hike and saw the pound fall back while the pricing of short-term rates has been reduced. The pound is currently around 1.069, 1.6% lower on Friday and 5.3% below where it was before the growth plan.
Helping to explain volatility is how murky the outlook is . With longer-term sustainability issues hinged on the effectiveness of supply-side reforms and tax cuts designed to stimulate growth, the lack of detail complicates what would already be a difficult assessment. We now have more clarity on the timeline form here. Chancellor Kwarteng presented a medium-term fiscal strategy plan on November 23 and promised to reduce debt as a percentage of GDP. This update will be accompanied by a forecast from the Independent Office for Budget Accountability. The Bank of England’s statement followed shortly after the Chancellor’s and hailed the Treasury’s commitment to “the role of the Office for Budget Responsibility”.
The BoE statement was brief and said the MPC “will make a full assessment at its next scheduled meeting…and act accordingly.” “The MPC will not hesitate to change interest rates as much as necessary to bring inflation back to the 2% target in a sustainable way over the medium term.” The statement dampened expectations of an emergency hike. As many as 80 basis points of rate hikes had been expected this week, but that fell back to 10 basis points after the statement and the pound weakened. BoE prices had pushed 200bps of tightening up to and including the November meeting at one point, but now sit around 150bps for November and a peak in the bank rate of 6% by May next year. UK 2-year gilt yields rose another 56bps to 4.49%, a full point above Thursday’s level. The 10-year was up 42bp at 4.24%. It was 3.49% on Thursday.
Yields globally were also higher. US yields continued their ascent, with the 10yr up almost 22bps to 3.9%, outpacing the sell-off in the 2yr, where yields rose 14bp to 4.34%. Yields on German 10-year Bunds rose 9bp to 2.12%. Italy’s 10-year yield rose 22bps to 4.55%, with the spread to bunds the widest since May 2020, confirming that the Meloni-led coalition won around 44% of the vote in Italy’s elections, enough to give it a comfortable parliamentary majority.
The surge in US yields provided support, if more was needed, for the dollar. The DXY was up 0.8% at 114.09, with Bloomberg noting that the Fed’s trade-weighted U.S. dollar index hit a record high. The Kiwi underperformed again, down 1.9% against the USD at 0.5635. AUD fell 1.1% to below 65c for the first time since the initial COVID shock in 2020and before that since March 2009. The euro was down 0.8% against the dollar.
Stock markets struggled . APAC exchanges were generally lower, with the Nikkei losing 2.7% and the ASX 200 1.6% lower. The European share was generally weaker with the Euro Stoxx 50 losing 0.2%. US stocks were also down. The S&P500 fell 1% to a new low in 2022, while the Nasdaq was down 0.6%. The fifth consecutive daily decline in the Dow Jones pushed the index into bearish territory for the first time since the start of the pandemic. Italy’s FTSE MIB was an outlier, up 0.7%, as investors do not so far see a significant risk of political conflict with the European Union.
In economic news, the OECD’s interim forecast update showed sharply degraded global growthThe OECD warned of a harsh winter and the costs of war in Ukraine, while noting that inflation had widened and there was a need to raise interest rates in most major savings. Global growth has been reduced to just 2.2% in 2023, down from 2.8% in the June update. There was a sharp decline of 2.4ppt for Germany, which now shows -0.7% on 2023, while the Eurozone as a whole fell 1.3pp to 0.3. Australia has not been immune to a deteriorating global outlook, but is doing relatively well, with the OECD recording 2.0% growth in 2023. In the overnight data stream, there was no disagreement with the German Ifo survey, which showed that confidence fell from 88.6 to 84.3 against expectations of 87.0. The decline was driven by a 5.3 point drop in the expectations component and was seen across all sectors.
It is also worth noting Lagarde’s comments in regular testimony to the European Parliament. Lagarde downplayed the chances of quantitative tightening in the near term and stressed that policy rates are the preferred tool for now. “When we have completed our normalization of monetary policy, using the most appropriate, efficient and effective tool, which are interest rates, then we will ask ourselves: how, when, at what pace, at what pace, we are using the other monetary tools at our disposal, including quantitative tightening.The comments contrast somewhat with recent comments from Nagel of the Bundesbank who is “clearly in favor of a reduction in our balance sheet”.It should be remembered, however, that on current market prices, the ECB could be neutral, the Lagarde threshold to think QT, this year Some ECB estimates are around 2%, a level the ECB would hit in December if it matched prices current.
Meanwhile, in China, the PBoC reported more discomfort with the depreciation of the yuan while the CNY was within 1% of a 14-year low against the dollar. On Monday, the PBoC imposed a 20% risk reserve requirement on banks’ currency forward sales to customers, making it more expensive to bet against the yuan with derivatives.
- Expectations are for a slight uptick to 104.5 from 103.2 in the US Conference Board’s consumer confidence. Sales of new homes also come from the United States.
- There are a number of speakers from the Fed, including Evans and Bullard on the outlook, and Chairman Powell on a panel on digital currencies
- Bank of England Chief Economist Huw Pill speaks during a panel at the CEPR Barclays Monetary Policy Forum 2022 “Economic and Monetary Policy Challenges Ahead”