Falling apart at the seams

View from the Trading Desk:

It would, quite frankly, be an understatement to say that all is not well in the governing Conservative Party. Just look at markets for anything UK PLC-related over the past couple of weeks to see how confidence evaporated after the 'mini-Budget'. Britain's new Prime Minister, barely a month into the job, has embarked on a grand political experiment that has sorely backfired, leaving her on the brink of a full-scale rebellion from not only Tory backbenchers, but also from senior MPs inside her government. Lawmakers return to the House of Commons this week after conducting their annual party conferences, but the question everyone is asking is, just how much longer can Liz Truss survive?

For one thing, her head in the sand, 'growth, growth, growth' agenda of unfunded tax cuts is unlikely to win the support of the wider party. After all, her backbenches are filled with disgruntled former Ministers – most of whom didn't vote for her in the leadership contest – recently ousted from top positions in favour of inexperienced but fiercely loyal supporters. This leaves her in a strikingly similar position to Theresa May – whose backbenchers often held her to ransom over key Brexit issues during her spell as PM. It's probably best to say as little as possible about Truss's popularity with the wider electorate, but we will say this; according to YouGov, Truss is already less popular than Johnson ever was. 

 

 

For markets, the implicit vote of no confidence is overwhelmingly evident, with assets failing to recover from last month's rout on the back of chancellor Kwarteng's announcement of a £43bn stimulus package. The IMF has questioned why the UK would add fuel to an economy already suffering 40-year high inflation levels, while the Bank of England has had to implement emergency measures to stabilise the gilt market. Both Kwarteng and BoE Governor Andrew Bailey will travel to Washington this week for the IMF's annual meetings, with the onus on Kwarteng to explain how his policies will deliver despite seeming to work against the BoE's monetary policy. 

Bottom line: With the number of disgruntled MPs rising by the day, you do wonder just how much longer the government has before the whole situation implodes. At this stage, even a slimmed-down version of the 'mini-Budget' might fail to appease markets and would certainly make Truss's position untenable, leaving the door ajar to another messy leadership race. From our perspective, we expect elevated FX volatility to remain, centred around the Pound, until some clarity emerges.

 

The week ahead

GBP 

After hitting a high of $1.1488 against the Dollar last week, the Pound has retraced back below the $1.11 handle this morning. UK Chancellor Kwasi Kwarteng has brought forward the fiscal plan to the 31st of October as the Treasury seek to reassure markets after the fallout following the mini-budget. Prime Minister Liz Truss must now attempt to resolve discontent in the Conservative Party as serious questions about her leadership surface and concerns that continued infighting will play into the hands of Labour. Markets have priced in a 100 basis point interest rate hike at the bank's next meeting on the 3rd of November as UK gilt yields jumped higher this morning.   

  • UK Claimant Count Change for September will be released on Tuesday; estimates are for a 4.2K print. 
  • Bank of England Governor Andrew Bailey will speak on Tuesday; Monetary Policy Committee members will also be speaking throughout the week, including Chief Economist Huw Pill.
  • UK GDP MoM for August is expected to come in flat at 0.0% compared with 0.2% in July. 
  • UK Industrial Production and Manufacturing Production MoM for August are both forecast at -0.1% and will be published on Wednesday. 

EUR

The Euro continues to trade at the mercy of the US Dollar market dynamic, with the common currency exchanging hands at multi-year lows at the $0.97 handle in early trade today. The consensus that the European Central Bank should be moving more aggressively in terms of its hiking cycle is evident, with rates far below neutral. Governing Council members, including Klaas Knot, have called for more significant hikes at subsequent meetings following the 75 basis point hike in September. Elsewhere European gas prices have fallen to three-month lows as effective stockpiling, and some unexpectedly warm weather helped offset tight supply. 

  • Italian Industrial Production MoM for August is projected to be little changed at 0.0% versus 0.4% in July. 
  • Eurozone Industrial Production MoM in August will be released on Wednesday. Analysts expect a 0.7% reading versus a -2.3% decline in July. 
  • European Central Bank President Christine Lagarde is due to speak this Wednesday at 2:30PM. 
  • The G20 will be meeting on Wednesday and Thursday this week, along with IMF meetings scheduled throughout this week. 

USD

Annual meetings of the International Monetary Fund could create a headache for Federal Reserve Chairman Jerome Powell this week. Powell will be questioned on the pace of the central bank's hiking cycle and whether a slower path would be wise to consider. The strength of the US Dollar has created some fragility in markets, according to those at the IMF, with estimates of a $360bn cut in future income for developing countries as a result of the dominant Dollar. The central bank still remains committed to taming price pressures with a 75 basis point hike at its next meeting looking like a formality.  

  • US PPI and Core PPI MoM for September will be released on Wednesday, with readings of 0.2% and 0.3% expected. 
  • The Federal Open Market Committee meeting minutes from the recent September meeting are due to be published on Wednesday at 7:00PM. 
  • US CPI and Core CPI MoM for September are forecast to read 0.2% and 0.4%, respectively. 
  • To close out the week, Retail and Core Retail Sales MoM in September readings of 0.2% and -0.1% are estimated. 

 

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