Asset prices unphased by local shocks
While the UK has queues for petrol, across the pond, US Republicans are once again using the debt ceiling as a bargaining chip to water down President Joe Biden’s tax changes and spending plans. However, neither of these issues seem to be impacting markets. Even China’s regulatory crackdown and ensuing Evergrande saga—our vote for the most ironic name of all time—barely impacted markets.
Where those headlines have largely been ‘noise,’ the underlying ‘signal’ moving markets can be most usefully viewed from the central bank perspective, or more precisely, from a macroeconomic perspective. The FTSE 100 is up over 20% on the year and the Pound trade-weighted index is steady, while interest rate expectations point towards a Bank of England rate hike next year. Below is the change since the Monetary Policy Committee (MPC) meeting at the end of last week:
The last meeting shows a full quarter-point increase expected by the start of Q2 2022 and another by this time next year.
Bottom line: This is a significant move at a time when serious issues are cropping up in the UK economy. Obviously, it’s worth noting that the MPC has prescribed that a rate hike must precede a wind-down of quantitative easing, which is becoming a more pressing issue. The UK data calendar for this past month has been a sea of missed expectations: Retail Sales, Manufacturing Production, Index of Services, and Consumer Confidence are all down. Industrial Production was the one bright spot, and that’s going to take a hit with all the shortages recently. It might be that these economic trends improve, but perhaps more likely that the market realises economic reality isn’t reflected in the price.
The week ahead
Sterling ended last week around 0.45% lower against the US Dollar, marking a third consecutive weekly decline for Cable. Markets have begun pricing in an interest rate hike by the Bank of England for May 2022, with market consensus pointing to a 15 basis-point increase and one more hike later in the year. Despite the BoE appearing to move first in the central bank race to hike interest rates, upside movement in Cable has been muted. More concrete announcements on tapering from the Federal Reserve have kept a lid on any immediate gains for the Pound. Meanwhile, the UK’s petrol shortage led to panic buying over the weekend, with consumers fearful of further supply chain constraints, potentially dampening UK growth prospects heading into the winter.
- BoE Governor Andrew Bailey is due to speak at 7:00PM today at the Society of Professional Economists Annual Dinner and at 4:45PM on Wednesday at the European Central Bank Forum on Central Banking.
- Monetary Policy Committee member Catherine Mann is due to speak on Tuesday at 1:50PM.
- The Nationwide House Price Index m/m is due for release on Wednesday and is forecast to come in at 0.60% in September versus 2.10% in August.
- Final Gross Domestic Product q/q and Manufacturing PMI figures are due out on Friday, concluding a relatively quiet week on the UK data front.
EUR/USD was confined to a 70-pip trading range last week as Federal Reserve tapering announcements failed to inject any significant volatility into the pair. The German election was unable to shake the market as the final outcome of the proposed coalition government remains unclear. The Eurozone's September inflation figure due out this Friday is expected to reach its highest level since 2008; analysts at Nomura are expecting an annual rise as high as 3.5%. Continuation of high European gas prices heading into the winter, driven by supply shortages, could add as much as 0.5% to inflation moving into 2022, according to one Barclays economist. It’s set to be a fairly quiet week for European data; ECB President Christine Lagarde’s meetings throughout the week will be ones to watch.
- ECB President Lagarde spoke today at 12:45PM and will speak again on Tuesday at 1:00PM. She will also attend the ECB Forum on Wednesday.
- The latest German Gfk Consumer Climate release is expected to fall slightly to -1.6 following a reading of -1.2 last month.
- German Retail Sales m/m are forecast to tick higher in August to 1.6% versus -5.1% in July.
- Eurozone Consumer Price Index flash estimate y/y for September looks likely to come in around 3.3% versus the 3.0% reading in August.
The US Dollar Index continued to tick higher this morning after Friday’s modest gains. There are renewed highs in treasury yields following Wednesday’s Federal Reserve meeting which indicated tapering is to begin in November and be wrapped up by mid-2022. The US 10-Year Bond is approaching 1.50%—levels last hit in June. Shorter dated tenors are also shifting higher, with the 2-Year Note hitting its highest level since April 2020 at 0.28%. House of Representatives Speaker Nancy Pelosi has stated that the $1tn infrastructure package is due to be passed this week, while the $3.5tn package is yet to be finalised. Core Personal Consumption Expenditures data out at the end of the week will provide more colour on the recent Fed decision to scale back asset purchases in the coming months.
- Federal Reserve Chairman Jerome Powell will speak this Tuesday at 3:00PM and attend the ECB Forum on Wednesday. Several Federal Open Market Committee members will also be speaking throughout the week.
- US Unemployment Claims are expected to fall to 328K in the week ending 25th of September versus 351K a week prior.
- The latest Core PCE Price Index m/m reading is to be released on Friday and is forecast to come in at 0.2% for August compared to a 0.3% rise in July.
- The ISM Manufacturing Purchasing Managers’ Index looks to be little changed from last month, with analysts predicting a 59.6 reading following 59.9 in September.
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