October 19, 2022

Daily Report 19/10/2022

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After posting strong gains into the European open on Tuesday, Sterling was unable to make further headway as underlying sentiment remained very fragile. Significantly, the UK currency was unable to gain further support from a fresh advance in UK equities. There was also little significant benefit from a slide in gas prices to the lowest level for over 3 months. There was a further shift in Bank of England interest rate expectations with markets now expecting a peak in rates just above 5.0% compared with above 6.0% at the height of the bond-market selling. The central bank denied that there would be a further delay in enacting the quantitative tightening programme and selling gilts. The central bank stated later that the first gilt sales will take place on November 1st, the day after the government medium-term statement. Political tensions remained extremely high with Prime Minister Truss under intense pressure and the Treasury warning over a very tough spending round. Sterling recovered some ground later in the day, but markets were still unconvinced over the underlying currency outlook. The headline UK inflation rate increased to 10.1% for September from 9.9% and slightly above 10.0%.

Key Data 

7.00 Core Consumer Price Index (YoY) (Sep) Act. 10.1% Exp. 10% Prev. 9.9%

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The German ZEW investor confidence index recovered slightly to -59.2 for October from -61.9 the previous month and stronger than consensus forecasts of -65.7, but the current conditions index dipped further to -72.2 from -60.5 in September which illustrated that there are still important stresses within the German economy. Markets were attempting to adopt a forward looking stance, but there were expectations of a further sharp ECB rate increase this month.

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US industrial production increased 0.4% in September after a revised 0.1% decline the previous month and above expectations of a 0.2% increase while capacity use also edged higher. The NAHB housing index declined to 38 for October from 46 the previous month with all components weaker on the month. This was below market expectations of 43 and the lowest reading since May 2020 while, excluding covid, it was the weakest reading for 10 years. The data reinforced expectations of further weakness in the housing market over the next few months. Minneapolis Fed President Kashkari stated that inflation is much too high and rates could easily get to 4.5% next year and could go higher if there is no progress on inflation, although he added that the central bank won’t need to do as much if there is help from the supply side.

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