October 28, 2022

Daily Report 28/10/2022

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The CBI retail sales index recovered sharply to 18 for October from -20 the previous month and much stronger than consensus forecasts of -15. Sales, however, are expected to decline again for November as underlying caution prevailed. There was also a dip in Bank of England expectations with markets no longer fully pricing in a 75 basis-point increase for the November meeting. The potential negative impact on Sterling was limited by the retreat in global yields, but there were still important reservations surrounding demand conditions.

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German consumer confidence recovered marginally to -41.9 for November from -42.8 previously and in line with expectations. The Euro was unable to make any headway ahead of Thursday’s New York open with the currency drifting lower into the ECB policy decision. The ECB increased interest rates by 75 basis points to 2.00% which was in line with market expectations.  The deposit rate was increased to 1.50% and the highest rate since 2009. The central bank also removed a subsidy on the long-term TLTRO loans to the banking sector in order to curb market liquidity. In her press conference, Bank President Lagarde stated that the bank had made substantial progress in withdrawing accommodation. She added that inflation remains far too high while further economic weakening is expected over the remainder of this year and into 2023. Economic risks are still clearly to the downside and a weakening of demand would lower price pressures. The bank expects further rate hikes, but these will be data-dependent, and she avoided giving forward guidance.

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The U.S. dollar, as measured by the DXY index, jumped on Thursday, rising about 0.8% 110.58, boosted by a steep drop in the euro following the European Central Bank’s monetary policy announcement. For context, the ECB raised interest rates by 75 basis points to 1.50%, in line with expectations, but failed to embrace a hawkish stance amid mounting recession risks. Yesterdays moves in the FX market came despite a sharp drop in U.S. Treasury yields seen across the curve in the wake of the release of U.S. gross domestic product data. Although third-quarter GDP surprised to the upside, growing at an annualized rate of 2.6% versus the 2.4% expected, the outturn was driven by the external sector, with other components largely muted, a sign of underlying economic weakness. In the face of rapidly softening demand conditions, the FOMC may be on the verge of adopting a less forceful and more data-dependent tightening bias, slowing the pace of interest rate hikes to avoid a severe downturn that could crush the labor market. This would not yet constitute a pivot, but it would be the first step in that direction. To better anticipate when the U.S. central bank may begin to change its strategy, it is important to closely watch how inflationary pressures evolve in the country. That said, traders will have a chance to assess the consumer price outlook on Friday when the U.S. Commerce Department releases the September Core PCE figure, the Federal Reserve’s favorite inflation gauge. This metric is forecast to have risen 0.2% month-over-month and 5.2% year-over year.

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