Will the Old Lady Spook the Markets?
Will the Old Lady Spook the Markets?
With calm seemingly having broken out amongst the ranks of the Conservative party, now the question is how long the unified front can last. There is always the appeal of getting your enemies to misbehave inside the tent instead of outside, and new Prime Minister Rishi Sunak is certainly trying that approach. Whether he is successful where others have failed will be revealed in the fullness of time, but to many, it feels like the lull before the storm. For the moment, though, sterling and gilts have dropped most of the political risk premium they had been carrying, and the feeling of calm is likely to be seen in a more dovish Bank of England at their monthly meeting this week.
Until the middle of last week, it seemed nailed on that the Old Lady would be moving Base Rate up by 75bp or possibly even 100bp. Still, such is the allure of the new administration that economists have been dialling back their predictions, and although 75bp is now the favoured forecast, only 50bp remains a distinct possibility. Certainly, spokespeople from the Bank feel like they have been laying the groundwork for a smaller-than-expected rise in recent speeches. Without a doubt, Jeremy Hunt’s fiscal prudence is alluring. However, with inflation still high and the European Central Bank already hiking by 75bp, it seems like a risk, which may be encouraged by the dollar-led sterling strength. So all eyes will swivel at lunchtime on Thursday towards Threadneedle Street, where the move will be revealed, setting the tone and direction for sterling for the subsequent few trading sessions.
With the euro stabilising slightly after the European Central Bank moved rates upwards last week, it felt at times that it should start trading again above parity. Although it did manage to break upwards, it certainly didn’t feel like it had much of a head for heights. This morning the eurozone’s Consumer Price Index will be revealed, and we expect it to be unpleasant if Germany’s figures, released on Friday, are anything to go by. Not only were they higher than forecast at 10.4%, but more worryingly, the rises are becoming more widespread across the economy. With Christine Lagarde already drawing attention to the looming recession, thoughts are now that the ECB will perform a dovish pivot in December, which will damage the euro. Whether this rhetoric stays will be partly determined by today’s CPI data which, if as expected, is near 10% is not good news.
It is a massively important week for the US financial markets, which will set the tone for the rest of the world’s markets. First, off the blocks, we have November’s Federal Open Market Committee meeting, which concludes on Wednesday. After last week’s data releases reported that inflation still appears to be heading upward whilst GDP is resilient in the face of the recent hikes, it is hard to see that the Federal Reserve will deliver anything less than 75bp. The question for the markets is how hawkish Chairman Powell is and whether he leaves the door slightly ajar for slowing the pace of hikes or, indeed, whether they hike by 100bp in an attempt to squash inflation once and for all. We feel that the Fed will go for 75bp but leave the door ajar for a slowing in the speed of increases. With the financial system creaking at the edges and with central bank’s mindful of the recent problems in the UK Gilt market, we feel that they might start to limit the interest rate rises and move towards a more incremental policy – the same end game but with less risk of sudden shocks to the system. Ahead of the Fed and the Old Lady’s meetings, the Reserve Bank of Australia will meet and may signal that they are in tune with the “less high but for longer” policy.
After both the Fed and the Bank of England have met, we will see the entire run of US employment data as usual for the first week of the month, culminating with Nonfarm Payrolls on Friday, which is expected to be a relatively good number. Whether the number will be soft enough to make the Fed sit up and think is, at the moment, not considered likely, with the forecast settling around 220,000. The market’s focus will also start to switch away from the Fed to the US Mid Term elections, which are held on 8th November, the results of which will determine how much President Biden can achieve, which in turn affects the economy and may impact on Fed policy in the New Year.
Finally, to return to the Bank of England, who must be dizzied by the number of U-Turns the government has made in recent weeks. Assuming, which in the UK these days is not as easy as it once was, that we still have the same Prime Minister and Chancellor on Thursday, we expect the Old Lady to err once again on the side of caution. She has, in effect, been given a get-out of jail card by the delay in the Chancellor’s Autumn Statement. Without a doubt, the recent data in the UK has been, being kind, not brilliant, which could give the Monetary Policy Committee the excuse that they need. But, and there always is a but, sterling certainly isn’t out of the woods yet, and too many dovish signals from the Bank, and we could be heading back to the lower end of its trading range. Are we heading for a Nightmare on Threadneedle Street? We hope not…..
20221031
