UK CPI unchanged at 6.7% y/y in September

By Jeanne Walters

UK headline CPI remained unchanged at 6.7% y/y in September, with higher oil prices offsetting slowing food price inflation. Headline CPI had been expected to decline marginally to 6.6%. Core inflation also fell by less than had been expected, to 6.1% from 6.2% in August, with all of the decline coming from core goods inflation. An area of concern for the BOE will be the surprise rise in services inflation, from 6.8% to 6.9% in September. Nonetheless headline inflation is expected to fall materially into October, primarily as a result of the reduction in the energy price cap from 1 October.

The MBA measure of US mortgage applications fell to a 28-year low in the week ending 13 October, declining 6.9%. This was on the back of borrowing costs rising for the 6^th consecutive week, with the rate on a 30-year fixed rate mortgage rising to 7.7%. US building permits, a leading indicator of housing demand also declined in September, falling 4.4%.

Today’s Economic Data and Events

16:30 US Initial jobless claims, w/e 14 Oct. Forecast: 210K

18:00 US Conference board leading index, Sept. Forecast: -0.4% m/m

Fixed Income

US Treasuries closed weaker overnight following a broad sell-off in benchmark government bonds. Yields on the 2yr UST added 1bps to settle at 5.225%, moderated somewhat by comments from Fed governor Christopher Waller who said the Fed could “wait, watch and see” before committing to more rate hikes at the FOMC in November. The 10yr UST sold off more heavily with yields up 8bps at 4.9149%.

Gilts plunged overnight with 10yr yields up 15bps at 4.654% as inflation in the UK remained steady in September. European bonds also closed weaker.

Emerging market bonds settled weaker overnight with the broad USD Bloomberg index down 0.4%. GCC credit also closed weaker, off by 0.8% with IG GCC credit taking a particular move lower.

The US dollar rose against peers overnight even as the move in Treasury yields was modest compared with other benchmark bonds. EURUSD dropped 0.4% to 1.0536 while GBPUSD dropped by 0.3% to 1.214 and USDJPY added a bit less than 0.1% to 149.93.

Commodity currencies also closed weaker with USDCAD rising by 0.5% to 1.3716 while AUDUSD dropped 0.5% to 0.6336 and NZDUSD fell 0.7% to 0.5856.

Equities

Geopolitical tensions and the prospect of higher-for-longer interest rates weighed heavily on global equity markets yesterday. In the US, the Dow Jones, the S&P 500, and the NASDAQ dropped 1.0%, 1.3%, and 1.6% respectively.

Earlier in the day the composite European STOXX index had ended down 1.1%, with the FTSE 100 dropping by the same amount.

Locally, the ADX fell 0.7% and the DFM 1.4%. Saudi Arabia’s Tadawul ended the day down 0.2% while the Borsa Istanbul dropped 3.4%.

Commodities

Oil prices closed higher overnight with Brent futures at USD 91.50/b, up 1.8% while WTI added 1.9% to close at USD 88.32/b. Data from the EIA showed a drain in stockpiles of more than 4.4m bbl last week along with drops in gasoline and distillate inventories. Oil production held steady at 13.2m b/d.

The US has eased some sanctions on Venezuela’s oil industry to allow some licensing. Turning production around in the South American nation will take time but could help to alleviate some tightness in oil market balances.