November 14, 2022

Daily Report 14/11/2022

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There was only limited reaction to the latest UK data with a weaker than expected GDP reading for September offset by a smaller than expected contraction for the third quarter. Although there will be key domestic elements next week, the immediate market focus was more on international developments. Bank of England Governor Bailey stated that more interest rate hikes are likely over the next few months while efforts to bring inflation under control will take 18 months to two years, but he was hopeful that inflation would peak over the winter. Overall confidence in the UK fundamentals remained fragile. The NIESR was more cautious and stated that interest rates would probably have to increase to 4.75% to bring inflation back to target. Bank of England MPC member Tenreyro, however, maintained a dovish stance as monetary policy has already been tightened significantly, but the effects on demand have yet to be seen.  She also stated that interest rates should not be increased to above 3.0% in 2023 and should then cut rates in 2024 as rates at this level would further reduce output below potential and there was a risk of over-tightening. Tenreyro also commented that there were signs that the labour market is softening.

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Risk appetite firmed again in early Europe on Friday following the latest developments in China. The Beijing authorities announced that there would be a targeted and precise approach to zero covid cases amid a further strong increase in daily cases. There will be a relaxation in quarantine and travel restrictions which boosted optimism over a rebound in the Chinese economy which underpinned risk appetite and also boosted Euro demand on Friday. Reports that Russian forces had moved out of Kherson also helped underpin Euro confidence to some extent.

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In comments on Sunday, Fed Governor Waller stated that the central bank November statement was designed to signal a step-down to 50 basis-point rate hikes, but added that the CPI report was just one data point and that markets are way out in front. He added that the Fed still has a lot of work to do and that rates will stay high for a while. The University of Michigan consumer confidence index dipped to a 4-month low of 54.7 for November from 59.9 the previous month and significantly below consensus forecasts of 59.5. There was a sharp retreat in the current conditions index with the expectations component also posting significant losses on the month.

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