Main Headlines
Following the mini-budget we saw yields on gilts spike, with interest rate expectations spiking also.
Since the U-turn on the Liz Truss economic growth plan, we’ve not only seen yields on gilts ease off, but also interest rate expectations. Markets are expecting interest rates to peak to around 5% by May next year, that’s down from 6.25% at the peak spike.
Tomorrow’s inflation data will be as important as ever in determining future expectations
Markets
GBP
The Chancellor has made his mark and announced he will reverse almost all of the tax cuts that were announced in the mini-budget, raising almost £32bn. The move will be a massive blow to Liz Truss, who built most of her Tory leadership campaign on this economic program, with calls for her to quit getting louder and louder. Sterling started the day in the green, carrying on the gains from last week.
Yesterday afternoon in the House of Commons, Penny Mourdant stepped in for Liz Truss to answer an urgent question by Labour. Sterling rallied further as speculation mounted that perhaps Liz Truss’s tenure as PM was coming close to an end – the markets are clearly making their feelings felt.
On a technical level, seeing sterling clear last week’s highs gives indicators that we could see further gains on the pound, and thus maintains what we said yesterday that sterling looks to be supported going into the OBR and Fiscal Plan announcement on the 31st October.
This morning we will have a 30-year gilt auction by the UK Debt Management Office. We will monitor the take up of the auction to get a gauge of market confidence.
Early this morning, the FT has reported that the Bank of England is set to delay quantitative tightening, i.e. pushing back the sale of bonds. The Bank of England was set to start QT at the end of this month. There was an initial spike on the pound but moves have stabilised.
Tomorrow’s inflation data will be very key in guiding interest rate expectations which have gradually been easing off over the last week.
EUR
Euro news still remains subordinate to the wider themes in the market, but the risk-on environment has given reason for the euro to steadily climb versus the US dollar.
ECB member Villeroy commented yesterday, backing similar comments by the ECB which seem to be to get interest rates to 2% as quickly as possible before then deciding to slow hikes in interest rates.
Today sees the release of the ZEW investor Germany survey, which is likely to continue its decline, especially since last week’s forecast by the German government as well as the IMF that Germany is heading for a recession.
ECB members Makhlouf and Schnabel will be speaking.
USD
Markets turned risk-on yesterday following the announcement by Chancellor Hunt, causing equities to rise, and continuing weakness of the US dollar seen since last Thursday’s inflation data. We said last week’s price action was very interesting considering the higher than expected inflation print, and it continues to be so. Have markets priced in peak interest rates by the Fed? We may not be in Fed Pivot mode but are markets pivoting on the US dollar? May be too early to say, but sellers of US dollars should consider this.
Should equities continue to bounce higher, then we should see the US dollar continue to weaken in the absence of any significant data points until Wednesday and Thursday’s housing data.
Ballinger & Co.. Morning Report- 18th October 2022
Market Rates
Today’s Interbank Rates at 10:00 am against sterling movement.
GBP>EUR – 1.1487
GBP>USD – 1.1293
EUR>USD – 0.9840
GBP>CAD – 1.5534
GBP>AUD – 1.7991
GBP>SEK – 12.542
GBP>AED – 4.1508
GBP>HKD – 8.8670
GBP>ZAR – 20.411
GBP>CHF – 1.1258
Today’s Calendar
· EUR ZEW Survey – Economic Sentiment(Oct)
· EUR ZEW Survey – Current Situation(Oct)
· EUR ZEW Survey – Economic Sentiment(Oct)
· EUR ECB’s Schnabel speech
· USD Monthly Budget Statement(Sep)
· USD Fed’s Kashkari speech
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