August 25, 2022

Daily Report 25/08/2022

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Underlying confidence in the UK economy remained weak during Wednesday with further concerns over the threat of a slide into recession as the sharp increase in energy prices hurts consumers and businesses. Domestic and global yields trends were important during the day with sharp moves in yields. There was a further shift in futures market with expectations that base rates would be increased to 3.50% by the end of 2022 from 1.75% now. The 2-year gilt yield also increased to a fresh 14-year high to 2.96%. Sterling struggled to gain any traction from higher yields, especially with fears that higher rates would exacerbate the downturn in the economy. With wider US dollar gains, Sterling dipped to lows ahead of the New York open and, although it moved back as the US currency lost ground, there was still interest in selling rallies. Political developments will be monitored closely with the October price cap on energy prices due to be set on Friday which will intensify pressure for further support measures.

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Tight ranges prevailed ahead of Wednesday’s New York open with the Euro tending to drift lower as a lack of underlying confidence in the Euro-Zone outlook continued to sap overall support. After some relief on Tuesday, gas prices increased again on Wednesday which undermined confidence. The German Cabinet approved energy-saving measures, including measures to restrict lighting, although the measures overall are only expected to cut gas demand by 2-2.5% and there were still important concerns surrounding energy supplies during the winter period. The German 10-year yield increased to an 8-year high above 1.35% on Wednesday amid inflation fears. Markets also priced in 100 basis points of ECB tightening by October, although the Euro overall struggled to gain any significant support from higher yields amid fears over that there will be a deep recession.

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The Kansas City Fed Jackson Hole symposium will open on Thursday, although there will be no significant developments until after the European close. The main focus will continue to be on Friday’s speech by Fed Chair Powell. There are expectations that Powell will have to maintain a generally hawkish policy stance with the commitment to tackle inflation. Overall guidance on rate hikes will be watched very closely with choppy trading inevitable on Friday.

Key Data 

13.30 Gross Domestic Product Annualised (Q2) Exp. -0.8% Prev. -0.9%

15.00 Jackson Hole Symposium