View from the Trading Desk:

Amongst other things, in the past week, we have seen the Russia-Ukraine war ramp up in intensity, OPEC trying to push up the price of oil, the highest US core inflation figure since the 1980's heading into the mid-term elections, and China's Xi Jinping targeting reunification with Taiwan. Yet, the biggest macroeconomic risk out there remains the comedy sketch show that is the UK government, as they try to go a day without either a ridiculous new policy or an embarrassing U-Turn.

On Friday, just after he touched down from the IMF meetings in Washington, Kwasi Kwarteng was relieved of his duties as Chancellor of the Exchequer – and it could be said it's a shame that Liz Truss didn't take the opportunity to announce her own resignation at the same time. Kwarteng was immediately replaced by the former Foreign Secretary, Jeremy Hunt, who has a decade of Cabinet experience spanning the last period of economic austerity… hint, hint. It was announced that corporation tax would, in fact, rise, in another mini-budget U-Turn, with more of the same to follow. Markets, however, were unconvinced, with Gilts continuing to sell off up to the close as investors delivered the verdict that all confidence in Truss's leadership had been lost.

This morning, we woke to the news that the planned cut to the basic rate of income tax would also be scrapped after Hunt's weekend interview emphasising his commitment to fiscal discipline and financial stability. Both economists and the media have taken the view that the Chancellor is now running the show, with a distinct change of rhetoric coming out of Number 10. It's hard to believe that Truss can survive until the end of the week, let alone the next general election, and supporters of Rishi Sunak have stepped up a gear in their efforts to install the former Chancellor. Still, market turmoil has calmed for now, with yields on UK government debt falling throughout the morning. The Pound remains on decent footing, relatively, with the probability rising that we have seen the GBP/USD pair bottom out in the near term. It remains difficult to pose the bullish argument for Sterling, though; Truss could limp on for weeks, if not months more, if markets remain placid.

Bottom line: It's a pivotal week for the UK as the government lays out its new plans to balance the books today. Bloomberg Economics has calculated that there is anywhere between a £28bn-£50bn hole to be filled, which will almost certainly require a new period of austerity along with more tax U-Turns. Markets should react favourably to this as fiscal and monetary policy begin to harmonise, even if it might inflict more short-term pain with the cost-of-living crisis. The Pound's near-term volatility metrics remain elevated as traders anticipate large swings over the coming week.

 

The week ahead

GBP 

The Pound has gained 2% on a trade-weighted basis in the last week as markets anticipate a more prudent approach to fiscal policy under new UK Chancellor Jeremy Hunt. Pressure on Prime Minister Liz Truss is building with Tory party MPs strategising methods to instigate a vote of no confidence as Labour pulls ahead in the polls. Fresh forecasts point to a recession in the UK lasting well into the second half of 2023; however, energy price caps introduced by the government should dent the severity of the downturn. Markets have tempered BOE rate hike bets this morning with less than 175 basis points of hikes between now and year-end. 

• The October print for the Rightmove House Price Index MoM was published this morning at 0.9% versus 0.7% in September. 
• UK CPI and Core CPI YoY for September will be released tomorrow, with 10.1% and 6.4% readings expected. 
• Monetary Policy Committee member Catherine Mann is due to speak this Wednesday at 4:00PM. 
• UK Retail Sales MoM for September are scheduled for release this Friday; analysts are forecasting a -0.5% print. 

EUR

The common currency has been trading range-bound against the US Dollar over the last week, holding onto the $0.97 handle as markets contemplate the size of the interest rate hike at the ECB's next meeting. It's thought consensus on the governing council for consistent, aggressive interest rate hikes is becoming fragmented as concerns about the probability of recession and the more worrying prospect of stagflation are at the forefront of officials' thinking. A 75 basis point hike is expected at the central bank's meeting next week, followed by a 50 basis point move in December.

• German Bundesbank President Joachim Nagel is scheduled to speak this evening at 8:00PM about the role of the European Central Bank in managing price stability. 
• Eurozone and German ZEW Economic Sentiment for October will be released on Tuesday, with -61.2 and -66.7 prints expected. 
• German PPI MoM for September is forecast to come in at 1.3% versus 7.9% in August and will be released on Thursday. 
• Eurozone Consumer Confidence is due this Friday; analysts are projecting a -30 reading for October. 

USD

Dollar strength took a breather last week, with the DXY trading flat and US equities staging a marginal decline. US Treasury yields are lower across the curve this morning as markets predict that the Federal Reserve will deliver a fourth straight 75 basis point interest rate hike at its meeting at the start of November, with a terminal rate close to 5% priced in by the end of March 2023. Concerns about a hard landing for the US economy are still well founded and a possibility, according to Goldman Sachs, with the US bank projecting a decline to 3,150 on the S&P 500 if the US economy fails to avert economic weakness brought on by higher inflation and interest rates. 

• The US Empire State Manufacturing Index for October is due to be released today; forecasts are for a -4.3 reading. 
• A number of Federal Open Market Committee members will be speaking throughout the week, including James Bullard and John Williams. 
• The Philadelphia Fed Manufacturing Index October data is expected on Thursday; estimates point to a -5.0 print. 
• US Unemployment Claims for the week ending the 15th of October are forecast at 235K versus 228K in the week prior. 

 

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