Is Liz Truss in the last Chancellor saloon?
Is Liz Truss in the last Chancellor saloon?
Another week and another series of wild trading sessions as volatility continued to reign supreme in the world’s financial markets. Sterling was in the limelight for much of the time, with the government appearing to be in complete disarray and, as I write this, seemingly no closer to being a unified party. What is clear, through the fog, is that the financial system in the UK is creaking with the difficulties that pension funds face with their exposure to the gilt market. Much has been written about the problems which are far more complex than many politicians are making them. We feel that it is unlikely that the UK bond markets are the only ones with these issues, primarily caused by the extended period of ultra-low rates that we have recently been through, and there may be more trouble ahead.
If, as we think it is possible, the UK is acting as the canary in the coal mine for the world’s financial systems, then the recent volatility that we have seen will undoubtedly increase. The problem governments and central banks face are how do you control the inflation they have released whilst dealing with the recessions that either have or are about to hit economies. The cause of much of the volatility at the end of last week was the slightly hotter-than-expected US inflation data increasing the likelihood of a 75bp rise at the 2nd of November FOMC meeting, with the terminal rate for the US now edging towards 4.9%.
This week we expect to see more tangible evidence that the Fed’s policies are starting to work with the release of housing data this afternoon, tomorrow and Thursday. With mortgage applications at their lowest levels for at least ten years after the sharp rises in interest rates, the housing data is unlikely to make for cheerful reading for homeowners. With the housing sector weakening, it looks like the Federal Reserve’s policies are starting to work and may be taken as a sign that the economy is beginning to hit the buffers. Still, we don’t expect the Fed to perform a policy pivot any time soon.
The influence of the Federal Reserve can be seen in the sterling market, where both the pound and interest rates are feeling the effects of US policy. Of course, the pound’s woes are compounded by the utter shambles that the present government has become. Whether the U-Turns that the UK government is trying to perform were forced by the equally inept Bank of England, the markets or the IMF, time will tell. It’s also not clear that the new chancellor’s policies are enough to ease the pressure on sterling is open to debate. In fairness to Jeremy Hunt, we should at least wait till his announcements later this morning before passing judgement.
It also seems clear that Liz Truss is clinging to power by the thinnest of threads and appears unlikely to survive the week. With the government backtracking on its plans not to hike corporation tax, its funding requirement is lessened, hopefully stabilising the gilt market. But markets hate political uncertainty, so any reprieve and calm will likely be temporary, especially now that the Bank of England has withdrawn support from the market.
Over the weekend, Andrew Bailey suggested that interest rates need to rise sharply; now, talking the talk is one thing and whether he walks the walk and increases them by 1% is another. This week we see tangible evidence for the need for the Bank of England to hike rates with the release of a complete set of inflation data from the Office of National Statistics, which should be fun! The Consumer Price Index, released on Wednesday, should edge higher. Still, hopefully, we are approaching the peak after the government capped domestic energy bills, but a close eye should be kept on the PPI data to see if the input side of inflation is also slowing. Also on Wednesday, Jon Cunliffe and Andrew Hauser from the Bank of England face a Treasury Select Committee, which could be fascinating considering the Old Lady’s recent activities. Finally, on the data docket in the UK are September’s Retail Sales, released on Friday, which also is predicted to show a slight bounce back from August’s disaster.
The euro, of course, has its challenges, and the ECB is also bracing itself for interest rate hikes next month. How much pressure they will be under will be more apparent after the release on Wednesday of September’s Consumer Price Index. The recently released flash CPI saw the headline number jump by 1.2% monthly, which bodes ill for the final data, which is predicted to be around the 10% figure. Whilst these numbers cover the whole of Europe, it is worth remembering that the policies, particularly towards energy capping, are not uniform, so the actual figure may be somewhat higher than the data indicates.
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