BoE hikes and gives recession warnings

• The Bank of England hiked its benchmark bank rate by 75bps yesterday, following on from the three-quarter point hikes implemented by both the Fed and the ECB over the previous week. This takes the benchmark rate to 3.00%, the highest level since 2008, while the size of the move upwards was the biggest since 1989 barring a short-moved hike during the Black Wednesday crisis in 1992. The bank’s statement and subsequent press conference by Governor Andrew Bailey stressed the dangers posed to the economy by too-high inflation, which hit a multi-decade high of 10.1% in September (target 2.0%), stressing that the risks of not acting decisively now would prolong the pain even as the revised bank forecasts showed that the UK was already in recession. Moreover, the bank cautioned that the downturn would be protracted and continue through mid-2024 with unemployment hitting 6.5% by late 2025, from 3.5% presently.
• Turkish CPI inflation saw only a modest acceleration in October as it came in at 85.51% y/y, from 85.45% the previous month. This was just under the projected 85.6%, and hopes are rising that Turkish inflation has finally peaked on an annual basis given the base effects from 2021’s H2 currency depreciation. Prices were up 3.5% m/m, from 3.1% in September. However, while the pace might be easing off, inflationary pressures are unlikely to abate given the increasingly broad based nature – core inflation was at 70.5% y/y in October, up from 68.1% in September, while PPI rose to 157.7%, from 151.5%, suggesting that there are further price rises for consumers in the pipeline.
• The headline unemployment rate in the Eurozone stood at 6.6% in September, just lower than the 6.7% revision to the August figure, which was originally also at 6.6%. The labour market has been resilient despite the deteriorating economic outlook for the single currency bloc, with the current unemployment level marking a record low.
• In the US, initial jobless claims were at 217,000 in the week to October 29, broadly in line with the upwardly revised (from 217,000) 218,000 the previous week, and marginally lower than the predicted 220,000. Recent labour market data from the US has been especially strong with both the JOLTS and ADP figures this week surprising to the upside – all eyes now will be on the NFP report which is due later today, with a consensus forecast of 200,000.

Today’s Economic Data and Events

• 11:45 France industrial production, % y/y, September. Forecast: -1.0%
• 16:30 US nonfarm payrolls, October. Forecast: 200,000
• 16:30 Canada unemployment rate, October. Forecast: 5.3%

Fixed Income

• US Treasuries extended their post-FOMC losses overnight as markets accepted that no pivot from the Fed is coming in the near term. Yields on the 2yr UST added 9bps to 4.7138% while the 10yr UST yield added about 5bps to 4.1469%.
• Gilt yields were choppy following the Bank of England’s decision to hike rates by 75bps though also signalling that rates will not go up as markets were expecting. Yields on the 10yr gilt initially dropped to about 3.4% before jumping over the rest of the day and closing at 3.499%, up 11bps. European bond markets also closed lower with 10yr gilt yields adding 11bps to 2.239%.
• Fitch affirmed its ‘A+’ rating on Abu Dhabi Islamic Bank and maintained a stable outlook.

FX

• The dollar rallied strongly as markets positioned for more steady hikes from the Federal Reserve after this week’s FOMC meeting. EURUSD dropped by 0.7% to 0.9749 while USDJPY added 0.24% to 148.26. Most of the action was in the UK where GBPUSD dropped more than 2% to 1.116 following the Bank of England’s hike of 75bps accompanied with particularly dovish commentary. As the Bank of England flattens rate hike expectations, yield differentials will again play out in favour of the dollar against sterling.
• Commodity currencies all closed weaker against the dollar with USDCAD adding 0.25% to 1.3746, AUDUSD down 0.98% to 0.6289 and NZDUSD dropping by 0.81% to 0.5773.

Equities

• The final reading of the FOMC decision and subsequent press conference by chair Jerome Powell was ultimately found to be hawkish, and equity markets sold off as a result. Asian indices followed those of the US previous day yesterday, and the Nikkei dropped -0.1% and the Kospi -0.3%. Issues around lockdowns weighed even heavier on Chinese stocks and the Hang Seng dropped -3.1%.
• There were further losses in the US as well as all three major indices lost further ground following the FOMC decision. The Dow Jones, the S&P 500 and the NASDAQ dropped -0.4%, -1.1% and -1.7% respectively.

Commodities

• Oil price closed lower overnight with Brent futures at USD 94.67/b, down 1.55%, and WTI settling at USD 88.17/b, down 2%. The US and its allies have reportedly made a decision on what level to set a price cap on Russian oil though it has still not been released to the public.

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