Markets:
A vote of no confidence. Markets’ answer to UK Chancellor Kwarteng’s mini budget was clearcut. He announced a bunch of tax cuts including lowering the 45p top rate of income tax (40p instead) and a cut in stamp duty on home sales. The measures come on top of the governments’ earlier announced energy subsidies for consumers and companies which are expected to cost £60bn in the first six months and up to £150bn in grand total. The huge fiscal booster will mainly be financed by selling extra Gilts. The UK Debt Management Office raised its planned issuance for the 2022-2023 fiscal year from £131.5bn to £193.9bn. The additional supply announcement comes exactly one day after the Bank of England decided to actively sell Gilts out of their bond portfolio, aiming to reduce their balance sheet by £80bn over the next 12 months together with natural redemptions. UK yields increase by 16.7 bps (30-yr) to almost 50 bps (4-yr) as investors re-adjust their thinking on UK risk premia. The big economic gamble also added to a sharp further repricing of the Bank of England’s expected policy rate path. The BoE in its statement yesterday already suggested that additional price pressure might be coming from the demand side, against which it would also act forcefully. Markets contemplate an acceleration from yesterday’s 50 bps move to a 100 bps one (!) in November. Current expectations for the cycle peak are raised to 5.25% by mid next year. Cable faces a significant beating, dropping from 1.1275 to the low 1.10 area, the weakest since 1985. EUR/GBP surges from 0.8721 to 0.8825, the highest level since early 2021. The FTSE loses around 2%.
EMU September PMI’s were today’s most important eco release. The composite PMI declined further as expected, from 48.9 to 48.2. It’s the third consecutive month below the 50 boom/bust mark and the lowest outcome since January 2021. Data suggest a 0.1% GDP contraction in Q3. Details showed setbacks in both manufacturing (48.5 from 49.6) and services (48.9 from 49.8). S&P Global, responsible for the survey, said that forward-looking indicators such as new order inflows, backlog of work and future output expectations all suggested that the decline in PMI’s will gather further momentum in coming months. Demand is falling at steepening rates in both manufacturing and services as a result of the rising cost of living and growing gloom about future prospects. Soaring energy prices meanwhile added further to companies’ cost burdens, and also limited production in some cases, pushing survey price gauges higher to indicate a renewed acceleration of inflationary pressures. On a country level, Germany is facing the toughest conditions with the economy deteriorating at a rate not seen outside the pandemic since the global financial crisis.
Markets didn’t really respond to PMI’s with the post-FOMC trends just being extended. US yields add up to 2 bps at the very front end of the curve with the very long end losing around 1.5 bps. German Bund underperform US Treasuries with yield changes varying between -1.6 bps (30-yr) and +5 bps (4-yr). The Italian 10-yr yield spread vs Germany widens by 7 bps going into this weekend’s election which will likely result in a majority for centre-right parties. The trade-weighted dollar set a new high, taking out 112 for the first time since 2002. EUR/USD lost the 0.98 big figure, changing currently hands near 0.9750, also the lowest level since 2002. Main European equity indices lose around 2% with US exchanges opening 1.5% softer. The EuroStoxx50 dipped below the June sell-off low (3357) to the weakest since the end 2020 vaccination rally. The S&P is closing in on the June low at 3637.
