September 26, 2022

Daily Report 26/09/2022

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The UK September PMI manufacturing index edged higher to a 2-month high of 48.5 from 47.3 the previous month and above consensus forecasts of 47.5, but was still below the 50.0 level. The services-sector index declined to a 20-month low of 49.2 for the month from 50.9 the previous month and slightly below market expectations of 50.0. Overall business confidence declined to the lowest level since May 2020. Output prices increased at the slowest rate for 8 months, although still elevated.

Chancellor Kwarteng announced even more aggressive tax cuts than expected. As expected, the National Insurance increases were reversed and the planned corporate tax increases for next year were cancelled. In addition, there will also be income tax cuts from next April. The government expects that the energy guarantee scheme will cost £60bn over the next six months. Government borrowing will increase substantially for the next three years. The 2022/23 requirement is set to increase by £72bn to over £160bn with deficit likely to remain above £100bn over the following few years. UK yields increased sharply with the 5-year yield surging over 50 basis points to above 4.05% with the sharpest moves for over 30 years. Markets also expect that the Bank of England will have to raise interest rates more aggressively.

Overall confidence in the UK and Sterling outlook deteriorated sharply with heavy Sterling losses. The UK currency plunged to 37-year lows against the dollar while the Euro surged to 20-month highs. CFTC data recorded a decline in short, non-commercial Sterling positions to just below 55,000 contracts from 68,000 previously which suggests there is still scope for Sterling selling. The UK currency crashed in Asia on Monday with a record low against the dollar before a correction. with the Euro also surging to 2-year highs before a limited correction as overall confidence collapsed.

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German manufacturing and services sector were both in contraction territory for September and below expectations which maintained fears over the outlook.

The Euro-Zone PMI manufacturing index retreated to a 27-month low of 48.5 from 49.6 and slightly below forecasts while the services index retreated to a 19-month low of 48.9 from 49.8 with both figures slightly below market expectations. New orders declined sharply on the month while business confidence dipped sharply to the lowest level since May 2020. There was a renewed increase in costs and output charges increased at a faster rate despite weaker demand as companies protected margins.

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ECB’s President Lagarde speech

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The US PMI manufacturing index edged higher to a 2-month high of 51.8 for September from 51.5 previously and slightly above consensus forecasts of 51.1. The services-sector strengthened to a 3-month high of 49.2 from 43.7 and well above expectations of 45.0, although this was still the third successive month in contraction.

There was a further net easing of upward pressure on costs and selling prices, although pressures were still strong in historic terms. The data overall increased expectations that the US economy would out-perform Europe which provided additional dollar support with a surge to fresh 20-year highs with the Euro sliding.

CFTC data recorded a sharp reversal with investors moving to a net long position of over 33,000 contracts from a 12,000 short previously, increasing the scope for renewed position liquidation. Exit polls confirmed that the Brothers of Italy will win the Italian election with a right-wing coalition expected. The Euro remained under heavy pressure with 20-year lows.

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