25 October 2022
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Rishi Sunak becomes the third UK Prime Minister in three months

By Daniel Richards

  • Rishi Sunak will be formally asked to form a government today after securing the support of the majority of Conservative Party MPs. He was the most “market friendly” candidate and both the pound and gilts rallied on his appointment yesterday, although the pound subsequently gave up some of its gains overnight. Sunak is expected to retain Jeremy Hunt as chancellor, with the government’s new medium term fiscal plan set to be announced at the end of this month.   In comments made to a parliamentary committee yesterday, Deputy BOE Governor Dave Ramsden said the medium term fiscal plan would be very important for restoring the credibility of UK policy as markets “remain quite febrile”. He indicated that the Treasury was providing some information on the plans to the Bank of England so that they could be taken into account at the MPC meeting in early November.   
  • Sunak inherits an economy that is likely already in recession.  The preliminary S&P Global UK PMI survey for October paints a weak picture of activity, with the composite index falling to 47.2 in October from 49.1 in September. Notably this was the first time in 20 months that the services sub-component has fallen into contractionary territory (falling to 47.5 in October). Perhaps unsurprisingly, given the recent political and financial market turmoil, business expectations for the year ahead saw their biggest monthly fall since March 2020, dropping 6.5 points.   
  • Private-sector activity in the Eurozone remains on a downward trajectory as well with the flash composite index falling from 48.1 in September to 47.1 in October. This is the fourth consecutive month the reading for the region has been below the neutral 50-mark, further entrenching expectations of an impending recession. While both the manufacturing and services sub-components fell on the month, it was energy-intensive manufacturing companies that appear to have reported the biggest drops in activity. Within the Eurozone, the flash composite estimates suggest that activity amongst French firms stalled (recording a value of 50 in October from 51.2 in September), while activity in German firms contracted sharply. The German composite index recorded its lowest reading since June 2009, excluding the pandemic period, falling to 44.1 in October from 45.7 in September.  
  • The preliminary US composite index also points to a softening in business activity going into the final quarter of 2022. The composite index fell sharply in October to 47.3 from a reading of 49.5 in September. In contrast to previous months, both the manufacturing and services sub-components are now below the neutral 50 level. The services sub-component fell to 46.6 in October from 49.3 in September, while the manufacturing index fell to just 49.9 from 52 in September. Perhaps most interestingly, the unemployment index fell below 50 for the first time since June 2020, possibly providing a first indication of a weakening in the US labour market.   

Today’s Economic Data and Events

  • 12:00 Germany IFO Business Climate index (Oct) forecast 83.5 prev. 84.3
  • 18:00 US Conference Board Consumer Confidence (Oct) forecast 106.0 prev. 108.0

Fixed Income

  • US Treasury markets made an about turn during the trading session, rallying early in the day in line with more positive sentiment coming out from the UK before turning weaker in the afternoon session following a disappointing PMI print for October. Yields on the 2yr UST closed at 4.5046%, up 3bps, while the 10yr UST yield added a bit less than 3bps to close at 4.2424%.
  • Most of the action was in UK bond markets which rallied sharply on news that Rishi Sunak, a previous chancellor, will be named as the new prime minister. Taken as a expectation of more orthodox economic policy, gilt markets rallied enormously: the 2yr gilt yield closed down 24bps lower at 3.314% while the 10yr yield dropped 31bps to 3.729%. The positivity helped to spur rallies in European bond markets as well.  


  • Currency markets had a choppy day of trading overnight with the broader DXY index closing slightly lower. EURUSD added 0.12% to close at 0.9874 while GBPUSD failed to gain much of a Sunak-bounce, dropping by 0.2% to 1.1278. USDJPY pushed higher again, up by 0.85% to 148.91.
  • Commodity currencies were consistently weaker, with USDCAD up by 0.48% to 1.3705, while AUDUSD fell 1% to 0.6312 and NZDUD dropped by almost 1% to 0.5694.


  • Asian equity markets started the week mixed as the Nikkei managed to follow the lead from the US on Friday and closed up 0.3%, while other markets were weighed down by an unfavourable reaction to the political developments in China over the weekend where Xi Jinping secured his historic third term. The Shanghai Composite ended the day down -2.0% while the Hang Seng closed down -6.4%, the biggest one-day loss since the GFC.
  • The appointment of Rishi Sunak as the new UK prime minister was welcomed by UK assets, and the FTSE 100 which up %.6, the more domestically focused FTSE 250 ended the day 0.8% higher. Elsewhere in Europe, the CAC and the DAX both closed up 1.6%. In the US, positive news around earnings helped push the Dow Jones up 1.3%.
  • Locally, the ADX dropped -0.5% and the DFM -0.6%. In Saudi Arabia the Tadawul ended the day up 0.6% while Egypt’s EGX 30 also added 0.6%.



  • Oil prices were weaker at the start of the trading week with Brent futures down 0.26% at USD 93.26/b and WTI giving up 0.55% at USD 84.58/b. Poor Chinese economic data and a prolongation of the country’s stance on Covid-19 will mean a persistently soft demand story from China, weighing on the overall outlook for oil demand growth.




Written By

Daniel Richards Senior Economist

Edward Bell Head of Market Economics

Jeanne Walters Senior Economist

Khatija Haque Head of Research & Chief Economist

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Daniel Richards

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