Equities | Europe | Monetary Policy & Inflation | US
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
The aftermath of the ‘Fiscal Event’ stole the headlines last week. Initially, GBP/USD fell to levels last seen in the 1700s, while surging interest rates sparked discussion around ‘the UK Pension Problem’ and forced the Bank of England to intervene (Chart 1). The extreme moves in FX then reversed; GBP/USD ended +2.9% WoW (Chart 2). The same cannot be said for UK rates, though there was some reprieve (Chart 3).
Elsewhere, Federal Reserve (Fed) speakers remained hawkish with strong data (core PCE and consumption) unable to change their tune. The economic surprise index increased further. Meanwhile, in Europe, inflation prints finished out a rejuvenating week for EUR/USD (+1.2% WoW). Overall, European inflation grew faster than expected, though it slowed in Spain (-0.6% MoM) and France (-0.5% MoM).
The Week Ahead
The US week will be filled with seven Fed speakers (Dominique is paying close attention to Cook, who is one of the most dovish FOMC members). They may discuss when to slow/pause hikes to assess how much policy has already impacted the real economy (not much). Then, nonfarm payrolls will close out the week (Friday). Dominique sees scope for a positive surprise relative to the forecasted 250,000 on the back of falling jobless claims and the rebound in consumer perceptions of the labour market.
Europe will be comparatively quiet. PMIs (Monday and Wednesday) likely confirm strongly negative sentiment across the continent – the manufacturing components weakened for all but Italy and Poland. ECB minutes are published later in the week (Thursday). At this stage, Henry believes talk of quantitative tightening is premature. But getting a gist of how much discussion there was on the topic will be important, as will seeing how heavily Chief Economist Lane caveated his forecasts.
The Conservative government performed its first U-turn today – scrapping the cut to the 45% tax bracket – and more drama is to come in the UK. The Bank of England’s September Decision Maker Panel survey may reveal signs of hiring weakness and falling inflation expectations. We may see a significant moderation in the price growth trajectory, though the larger impact on consumer price expectations may not show yet. And, on Friday, the Office for Budget Responsibility (OBR) is expected to provide a first draft of its next economic forecasts, with a full iteration by the end of October. Having been brought forward, it will be available before the next BoE meeting (3 November) where markets expect a 120bp+ hike!
Elsewhere, we expect the RBA and RBNZ to hike by 50bp this week. We think the former is overpriced, in comparison to the latter. Meanwhile, the Bank of Japan’s Kuroda is speaking and there are important updates to China’s FX reserves, PMIs, and domestic credit.
For further analysis, read our Key Events report and watch Andrew and Dominique discuss the US labour market, how the pace of rate hikes may lead to some sort of crisis, and the week ahead!
Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.