Pounds Turn to Ounces
As we warned in last week’s report, financial markets duly suffered extreme volatility last week, as central banks worldwide showed their hands. As expected, the US Federal Reserve set the tone and placed the marker by which other central banks would be judged. As widely predicted, the Fed moved US rates up by 75bp and were uber hawkish in their forecasts. Many participants have been looking for, and possibly praying for, signs that the Fed would pivot policy and give hints of easing to come. In reality, the Fed had made it clear that they are not for turning and “higher for longer” is now their mantra. Stock markets again came under selling pressure, bond yields roared ahead, and the almighty dollar did what it has been doing best for weeks now…it climbed higher.
As the King dollar roared its defiance, the yen came under tremendous pressure and continued to suffer until the Bank of Japan intervened to try and reverse the trend, but the primary victim was closer to home, the pound. Having been under increased selling pressure over the last few weeks, it could reasonably be expected that the Bank of England, at their monthly meeting on Thursday, at last, paid some lip service to the currency. Instead, the markets got a 50bp rise in Base Rate, at the lower end of expectations, albeit with a split on the Monetary Policy Committee with four voting for 75bp; amazingly, one member voted for only 25bp. The markets took a deep breath and gave sterling an almighty push downwards, causing it to fall rapidly. The Bank of England’s folly was compounded by the mini-budget, in reality, more a maxi-budget, that Kwasi Kwarteng presented on Friday. The markets quickly sensed the dichotomy of the Old Lady needing to slam the brakes on with further interest rate rises whilst the government puts the pedal to the metal with tax cuts as it goes all out for growth. And the markets are rightly worried for, as we all know, braking hard and accelerating simultaneously does not make for a smooth journey!
With sterling already weak, the budget gave it the final push, and on Friday afternoon, it suffered its fourth biggest one-day down move for 20 years, with only Brexit, Covid and the Financial Crash equalling it. In an afternoon of unwanted records, our minds went back to the day that that sterling left the ERM, the 30th anniversary of which was only two weeks back and the Bank of England’s response on that day. In fairness, the Old Lady wasn’t independent in those days and was led by an incompetent Chancellor and Prime Minister. They raised rates from 12% to 15% during the day to no avail as they tried to defend the pound. We are not suggesting that interest rates need to move upwards that sharply, but we wouldn’t be surprised if the Bank of England made noises that an inter-meeting move upwards in Base Rate was a possibility. The possibility of a surprise rate hike has grown this morning, with sterling touching an all-time low of 1.0335. With no less than six speakers from the MPC pencilled in to take the microphone, they will have plenty of opportunity to try and calm the markets. Indeed, the derivative markets are reflecting the likelihood in their pricing as well as predicting that Base Rate will hit 5.5% next year. With this in mind and, hopefully, all the bad news in the market, we are starting to think that the fall in sterling may be a little overdone, and a bounce upwards is now due.
Whether the Bank of England does or does not try to talk sterling higher, there is an onslaught of Federal Reserve speakers this week looking to reiterate the Fed’s hawkish policy. Starting today with four members from the Fed’s rate-setting committee, there are no less than another 16 behind in the queue for the speaker’s rostrum over the next five days. In a week with little US data out till the end of the week, Fedspeak will set the tone and again, they will tell the markets that they are willing to sacrifice jobs and growth to cap inflation as they lay the foundations for another 75bp rise in November. Whether the Fed will change its tune after its favoured measure of inflation, the Personal Consumer Expenditure (PCE)Core Deflator is published on Friday will be worth watching out for as that may herald some dollar selling into the month end. The only other data published in the US are the latest housing sales data, with mortgage rates topping 6% are likely to have slowed sharply.
After a week where the euro tended to be in the shadows a fair bit, although it must be said that it has also fallen sharply, the eurozone returns into the limelight this week. On Thursday, Eurostat releases its takes on Consumer Confidence, and Economic sentiment, which are expected to be gloomy as the war in Ukraine grinds on with little prospect of an end. The meat in the sandwich is delivered on Friday morning with the publication of preliminary, or flash, Consumer Price Indexes for September, which could show a surprise jump after Germany’s incredible rise of 45.8% in Producer Price Index last week. Friday also sees the EU Unemployment rate for August, which is expected to stay steady. Finally, in what could become a growing problem for the Eurozone, Italy looks certain to have elected a hard-right Italian government.
We enter the new week with sterling under the cosh and volatility increasing but don’t worry; it’s nearly the end of September which leads us nicely into October … traditionally the most volatile month of the year! Stay safe and hold on; it’s going to be another wild ride!