Click here to read the PDF-version of this report.
• Jeremy Hunt to the rescue! The new UK Chancellor in an attempt to restore the UK’s credibility shelved the lion part of previous Chancellor Kwarteng’s mini-budget, while also lowering the bill to shield UK consumers and companies from expected surges in OFGEM’s regulated maximum gas & electricity prices. Around two-thirds of the £45bn mini Budget (all unfunded tax cuts) are eliminated with only a £13bn national insurance cut and a £1.5bn stamp duty cut surviving. Original plans to cap gas & electricity prices at £2100 between October and March next year and at £2500 until September 2024 are now replaced by an energy price guarantee which will only last until April next year and become more targeted afterwards. A new (long term) debt-cutting plan and OBR forecasts will be finalized on October 31, days before the next Bank of England policy meeting (November 3). UK yields drop by 35 bps to 45 bps in a bull flattening move. The Gilt rally occurs even as the Bank of England is no longer in the market as a stabilizing factor, suggesting that Hunt’s actions have an impact. The expected BoE policy rate peak, based on UK money markets, now stands at 5% in March, coming down from 5.5% last Friday. Sterling didn’t suffer as much as UK Gilts last week and ekes out only modest gains today with EUR/GBP changing hands near last week’s low of 0.8620 from an open near 0.87. Cable (GBP/USD) rises from 1.1184 to 1.1340, also testing last week’s highs.
• Global core bonds follow UK Gilts higher. The German yield curve bull flattens with yields 5.1 bps (2-yr) to 13.5 bps (30-yr) lower. US yields drop 6.9 bps (30-yr) to 12.9 bps (5-yr) with the belly of the curve outperforming the wings. European stock markets avoided the drop in the opening following Wall Street’s weak performance on Friday. The latter was linked to a US Treasury sell-off following hawkish Fed comments (tilting towards 5% policy rate peak) and rising consumer inflation expectations in the University of Michigan survey. Main European indices gain up to 1.5% at the moment with momentum building during the session. It gives the single currency a slight advantage over the dollar with EUR/USD moving above 0.9750 in a technically insignificant move. The October US empire Manufacturing Survey was today’s only market release. The indicator fell more than expected, from -1.5 to -9.1 (vs -4.3 forecast). It’s the third straight month in contraction territory (<0). Details were mixed. New order stabilized, but shipments fell. The number of employees was also slightly weaker, but the average workweek lengthened. The forward looking component (6 months ahead) fell from 8.2 to -1.8 and paint a more bleak economic outlook compared to the actual situation.
• Sweden’s Moderate Party leader Kristersson won a vote in parliament to become the next prime minister. He got the backing of the four (center-)right parties; his own Moderates, the Liberals, the Christian Democrats and Sweden Democrats. The latter is the biggest party to the right (and second biggest overall) but won’t be part of the government. Instead they have vowed support in exchange for having its policies on crime and migration implemented. One of Kristersson’s government first tasks will be to agree on spending plans for 2023 at a time of inflation biting in household spending and the central bank raising rates to tame it. EUR/SEK held just south of 11.
• Polish core inflation in September accelerated into the double digits. At 10.7% y/y (1.4% m/m), the underlying price gauge is up from 9.9% the month before to be at the fastest pace since 1999. Headline inflation quickened 17.2%. It calls the pause in the National Bank of Poland’s tightening cycle into question. At the previous meeting in October, the central bank unexpectedly kept rates steady at 6.75%, citing slowing growth. Chair Glapinski didn’t formally call the end of the cycle though, saying the November projections would decide whether or not additional tightening is necessary. The zloty reacted stoic on the release. EUR/PLN did erase an earlier advance following an FT report on the EC potentially freezing regional aid to Poland. The pair is currently changing hands in the 4.806 area.
Graphs & Table
UK 30-yr yield drops another 30 bps as new Chancellor Truss reverses Kwarteng’s fiscal policy mistakes
EuroStoxx50 rebounds on a global easing of tension after last week’s test of the YTD sell-off low
GBP/USD (cable): sterling avoided another drop last week, implying less rebound potential compared to UK Gilts
EUR/PLN: initial weakness on rumours about EU/Poland rule of law stand-off erased after higher core CPI figures
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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