Friday, 18 November 2022
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•          The UK announced a £55bn fiscal consolidation effort, consisting of £30bn in spending cuts (mainly going in effect from FY 2025/26) and £25bn in tax raises which brings the overall tax burden to a postwar record. UK finance minister Hunt’s Autumn Statement was aimed at tackling inflation and restoring investor confidence by bringing Britain on a sustainable path of debt reduction. He nevertheless also announced some supportive measures including household handouts and an extension to the energy price cap beyond April to address the cost-of-living squeeze and targeted investments to lift long-term growth. The OBR estimates that the UK economy will drop 1.4% next year and inflation would still amount to 7.4%. The pound fell but closed off intraday lows. EUR/GBP finished slightly higher at 0.873. Cable eased to 1.186 from a 1.196 intraday high. Gilt yield rose especially on the front end of the curve. Hunt said the UK is already in a recession but his plan would make it shallower thanks to the supportive measures. The fact that spending cuts don’t kick in straight away, probably also spurred the move. Changes ranged between 4 bps (30y) and 12.3 bps (2y). Core bond yields elsewhere also gained with US Treasuries underperforming Bunds. That’s despite a further easing in housing data and a steep drop in the Philly Fed business indicator but it followed comments from Fed’s Bullard. He said in his view rates should be at least 5-5.25%, adding that he hasn’t yet seen a lot of impact on inflation from earlier tightening. Kashkari (Minneapolis) later joined the growing Fed pushback against recent market repricing by downplaying the relevance of one month’s inflation data. He also said that the overwhelming feedback from local contacts is that there is still a lot of demand and not enough workers to meet that. US yields rose 3.6 bps (30y) to 9.7 bps (2y) on a daily basis. German yields advanced 2.4-3.6 bps in the 2y-10y segment. The dollar strengthened overall but was not able to retain all intraday gains. EUR/USD bounced of resistance near the 1.04 area towards the 1.03 zone before closing at 1.036. The trade-weighted greenback only eked out a slight net gain from 106.33 to 106.69.

•          Asian bourses follow WS’s choppy performance yesterday. Indices trade mixed but daily swings are limited to around 0.50% in both ways. Japanese inflation hit its fastest clip in 40 years (see below) but BoJ governor Kuroda already said that current inflation situation isn’t sustainable. The Japanese yen reacted muted with USD/JPY stabilizing just below 140. The US dollar eases slightly. US yields give up a little over 1 bp.

•          Today’s economic calendar concludes the UK update with October retail sales. They came in slightly below consensus at 0.6% m/m (-6.1%) for headline sales and 0.3% m/m (-6.7%) for sales ex auto fuel. The immediate market impact is limited and in any case contained to UK soil. EUR/GBP wanders in the low 0.87 area. Lacking drivers, we expect muted, sideways trading on other markets – core bonds and FX/dollar – going into the weekend. We look out whether weekly lows in the dollar and core bond yields hold. Speeches by ECB governors including Lagarde, Nagel and Knot are worth mentioning though. They serve as a wildcard, as does the amount of ECB TLTRO repayments.

News Headlines

•          British consumer confidence as measured by market research firm GFK improved modestly this month but remains at a very low level compared to historic standards. The headline index improved in November to -44 from -47 after setting an all-time low at -49 in September. The subcategories personal finances (over the previous and the next 12 months), economic situation (also both for the previous and the next 12 months), climate for major purchases and savings intentions al improved, albeit modestly. GFK indicated that the improvement was due to relief amongst UK consumers after the exit of PM Truss after her government’s plans triggered elevated financial uncertainty.

•          Inflation in Japan accelerated more than expected in October. The closely watched core measure excluding fresh food rose from 3.0% in September to 3.6% in October, reaching the highest levels since early 1982. It was the seventh consecutive month for this price measure to surpass the 2% BoJ inflation target. The headline index also jumped from 3.0% to 3.7%. The core index excluding food and energy jumped from 1.8% to 2.5% Y/Y, an indication that price pressures are becoming more broad-based. Price rises are also mitigated by government measures. Even so, the report probably won’t change the BoJ ultra-easy policy as it expects core inflation to return well below 2.0% next year and in 2024.


The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone.

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 5% early next year and remain above a neutral 2.5% over the policy horizon. A below consensus CPI print strengthened some Fed members call to slow down the pace of the tightening cycle, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests more downside potential.

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. EUR/USD left the strong downward trend channel since February. The current correction on bond markets weighs on USD. KEY resistance at 1.0341/50/68 risks giving away.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive.

Calendar & Table

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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