Queen Elizabeth II dies aged 96

• Britain’s Queen Elizabeth II died at her home at Balmoral, Scotland, yesterday. Aged 96, she had reigned for 70 years. She is succeeded by her son, King Charles III, and while as a constitutional monarchy there should be little material change in terms of the political or economic outlook for the UK or the Commonwealth countries of which she was also head of state – including Australia, Canada, and New Zealand – it will contribute to a feeling of flux in a week when a new prime minister was also appointed.
• New UK PM Liz Truss set out her plan for an energy support package in the House of Commons yesterday. In the accompanying ministerial statement, the government said that the ‘Energy Price Guarantee (EPG)’ would come into effect from October 1 and would mean that average households pay no more than GBP 2,500 annually for their energy bills over the next two years, saving some GBP 1,000 a year. The cap will take as much as 5pp off headline inflation according to the proposal and will provide critical support for struggling households, but criticisms levelled at the scheme are that the costs to government can not be predicted (but will likely cost somewhere around GBP 150bn over its duration), and that the cap will prevent demand destruction. Support for businesses, charities and public sector bodies was also pledged but with little detail forthcoming for now. Truss also ruled out any windfall tax on energy companies once again. Meanwhile, the treasury will set up a GBP 40bn fund with the BoE to ensure ample liquidity for energy firms as they grapple with rising prices.
• The ECB hiked its benchmark interest rates by 75bps yesterday, as had been anticipated. This takes the deposit facility rate to 0.75%, the first time it has been in positive territory since 2012. The central bank for the single currency bloc has been contending with accelerating inflation as the energy crisis in Europe has taken hold, and while core inflation has not accelerated to the degree seen in some other DMs as yet, the record-breaking headline numbers forced it to follow the Fed and other major central banks with an outsize move. The ECB statement said that the governing council intended to raise rates further, as it revised up its inflation projections to be higher for longer; it now sees inflation this year at 8.1% (previous forecast 6.8%), in 2023 at 5.5% (3.5% previously) and in 2024 at 2.3% (2.1%), meaning it expects price growth to still be above its target 2% rate in two years’ time. GDP growth forecasts were by contrast revised lower, with growth next year now projected at just 0.9% compared to the previous expectation of 2.1%.
• Fed Chair Jerome Powell spoke yesterday, where he reiterated the central bank’s commitment to its inflation-curbing efforts ‘until the job is done.’ With regards as to whether a 75bps hike will be implemented for the third time in a row at the upcoming September FOMC meeting, Powell would not be drawn, saying it would depend on the ‘totality’ of the data, but he did not push back against the idea, and his messaging remained hawkish so the chance of another outsize move upwards remains in play. The key data point to watch out for before the meeting is the CPI print for August, which is scheduled for release next Tuesday.
• US jobless claims in the week to September 3 came in at 222,000, fewer than the market projection of 235,000 and the (downwardly revised) 228,000 of the previous week. The labour market continues to show signs of strength, albeit with job creation slowing, even as the FOMC has swiftly tightened policy.
• China’s CPI inflation came in at 2.5% y/y in August, down from 2.7% in July and compared to estimates of 2.8%. PPI inflation meanwhile fell sharply to 2.3% down from 4.2%, and also below consensus projections of 3.2%. The slowdown in price growth was driven by ongoing lockdowns which have curbed consumer demand, and by the fall in global commodity prices which have dampened the factory gate figure.
• Egypt’s CPI inflation rate rose to 14.6% in August, up from 13.6% the previous month. Prices were 0.9% higher than in July. Food & beverages, the largest component of the basket, was the primary driver of the headline acceleration as it rose from 22.4% in July to 23.1%, but the rise was broad based across all components, suggesting that core inflation will also have risen from last month’s 15.6% when the figure is announced. August’s 14.6% is the highest CPI inflation reading since November 2018 but will likely peak soon as S&P Global’s PMI survey for August showed a softening in input price rises. Nevertheless, with commodity prices still high, and further EGP depreciation on the cards, many households and businesses will remain under pressure.

Today’s Economic Data and Events

• 10:45 France industrial production, July, % m/m. Forecast: -0.5%
• 16:30 Canada unemployment rate, August. Forecast: 5.0%

Fixed Income

• US Treasuries sold off overnight as Fed Chair Jerome Powell reaffirmed his commitment to fighting against inflation, saying the Fed needed to act “forthrightly, strongly” in setting policy. Chair Powell also pushed back against easing policy too early. Yields on the 2yr UST added 7bps overnight, closing at 3.5035% while the 10yr added about 5bps to 3.3170%. Market pricing has moved to near complete expectation for a 75bps hike at the September 21 FOMC with the release of next week’s inflation print the final variable.
• European bond markets slumped as the ECB hiked policy rates by 75bps and pledged to move on a meeting by meeting basis. ECB President Christine Lagarde said that the number of large hikes would be “more than two…but it’s probably also going to be less than five.” Yields on 10yr German bunds added almost 14bps to 1.707% while Italian yields rose by 11bps to 3.954% as did French 10yr bonds, closing at 2.252%. Gilt yields also extended their rise, up by 11bps to 3.142%.

FX

• Even as the ECB hiked by 75bps and outlined that it was prepared to tighten policy further, the Euro still recorded losses in response, down by about 0.1% to 0.9997. In early trade this morning the single currency has moved back up above parity, however. The challenges ahead for the Eurozone still remain stark and we suspect that the weakness for EURUSD hasn’t faded and more downside could yet be ahead.
• GBPUSD also dropped overnight, down by 0.25% to 1.1504 as the government’s plans to control inflation could end up leaving the government with an open-ended liability to offset energy costs. USDJPY added 0.26% to 144.11, its fourth day in a row of gains.
• In commodity currencies CAD was the outlier by managing to gain. USDCAD fell by 0.2% to 1.3092 while AUDUSD dropped by 0.27% to 0.6751 and NZDUSD fell by 0.36% to 0.6054.

Equities

• European equity markets were mixed yesterday, with some indices paring earlier losses to record gains by the close of the day. Germany’s DAX ended the day up 0.3%, as did the UK’s FTSE 100, but the CAC closed down-0.1%.
• In the US, the S&P 500 added 0.7% while the Dow Jones and the NASDAQ ended the day up 0.6%.
• Locally, the DFM closed down -0.7%, while by contrast the ADX gained 0.7%. The Tadawul lost -0.3%.

Commodities

• Oil prices managed to stem some weekly losses overnight with a gain of 1.3% in Brent to USD 89.15/b and WTI adding about 2% to USD 83.54/b. The US government may again release some of its strategic reserves to head off a pending hike in oil prices once EU sanctions on Russian oil imports come more fully into effect.
• Commercial crude stocks rose by 8.8m bbl last week, more than offsetting at 7.5m bbl draw in the SPR. Both gasoline and distillate stocks rose, albeit marginally. US oil production was flat at 12.1m b/d.

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