Will Boris Endorse Penny?

Will Boris Endorse Penny?
Another week another leader….and really, what a shambles our once proud democracy has become, typified by our last Prime Minister being in power for a shorter time than the legendary Brian Clough was at Leeds United. As we write this, it looks like Rishi Sunak will be the next occupant of 10 Downing Street after Boris Johnson pulled out of the contest last night, as Penny Mordaunt doesn’t seem to have enough support to challenge him. If Boris endorses Penny, the next PM will not be apparent until Friday. Whatever the outcome, though, a period of political stability is required. The question is not only who is next but, importantly, will they have time to prepare for a full budget statement, aptly perhaps, pencilled in for Halloween? If the budget is delayed, the Bank of England’s interest rate decision at their Monetary Policy Committee meeting on November 3rd becomes even more difficult. At the time of writing, the feeling is that the Old Lady will err on the side of caution and move rates by 75bp. Ben Broadbent, deputy governor of the BoE, was certainly erring on caution and said as much on Thursday.
Last week, the pound stayed mainly on the sidelines and traded in a tight range, which should continue until the leadership is resolved. But it had started to slide on Friday towards the lower end of its content at 1.10 against the dollar before bouncing back as the dollar reversed during the US session. With US Treasury yields still rising, sterling and gilts will remain vulnerable on the downside to King Dollar, especially if the markets get a whiff of a general election. Against the euro, sterling has been relatively stable as the euro has as many problems as the UK, with rising prices and energy worries paramount. With the German Producer Price Index popping again last month to an eye-watering 45.8 %, inflation isn’t going away any time soon!
Hopefully, at least for a few hours, attention will turn from London to Frankfurt on Wednesday as the council of the European Central Bank holds its monthly meeting. As with many things, what seemed unthinkable only a few months now seems likely as the ECB weighs a further move upwards by 75bp. As with the Federal Reserve, it feels that the ECB are ignoring recession risks and stamping hard on inflation. What until recently was a stubbornly dovish central bank has surprised us all with a rapid switch to a hawkish stance. We expect more of the same on Wednesday despite the growing uncertainty over the eurozone economy. The ECB is also expected to review its options for reducing market liquidity. Whether Madame Lagarde will consider Quantitative Tightening is unlikely after the Bank of England’s recent travails in the gilt market.
Europe also has a host of figures coming out this week, starting with S&P’s preliminary Purchasing Manager’s Indexes, which will be announced just as this note hits your inbox. Whether the ECB will change its stance on stamping hard on inflation even if the numbers disappoint is unlikely. Tomorrow IFO releases its Business assessments for Germany, which are unlikely to be too cheery. Finally, Germany released its GDP and Consumer Price Index on Friday and Eurostat published its Sentiment and Confidence indicators.
The dollar had a wild ride on Friday, driven by seemingly dovish comments from Fed member Mary Daly and a story in the Wall Street Journal that the Fed is considering a pivot from its present tightening policy. With the Fed’s next meeting now fast approaching, it’s perhaps a relief that the Fed official are in speech blackout mode. The US has a relatively quiet start to the week on data, which is probably just as well, considering what else is happening worldwide! It kicks off as elsewhere in the world with S&Ps Purchasing Managers Indexes this afternoon, but the real meat in the sandwich comes later in the week, starting with GDP on Thursday, which is expected to show some growth after the technical recession in the last couple of quarters. with the Federal Reserves favoured inflation indicator Personal Consumption Expenditures on Thursday which is forecast to mirror the Consumer Price Index by showing a rise to 5.2% from 4.9%. Unless there is a significant surprise in the numbers, nothing will distract the Fed from hiking by 75bp on November 2nd. Looking further out, though, the weakness in housing may start to give the Fed pause for thought, as may the consumer confidence figures tomorrow and the real estate data on Wednesday.
Looking further afield, Japan and the somewhat sickly yen will continue to be followed closely ahead of the next meeting of the Bank of Japan at the end of the week. After last Friday’s well-timed intervention drove the dollar rapidly down, traders will probably be a little more cautious this week, but the yen is nowhere near out of the woods. Elsewhere the Bank of Canada holds its monthly meeting on Wednesday when another 75bp rise looks nailed on. Another wild ride looks likely this week, and by the end of it, we will have a new Prime Minister and possibly a new chancellor. With so much to play for, the markets are sure to be volatile in sterling assets, so buckle and don’t forget we are here to help and guide you!
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