UK inflation reaches new 40-year high

• UK inflation reached a new 40-year high of 11.1% in October after rising 2.0% m/m, higher than forecast and up from September’s 10.1%. Core CPI was unchanged at 6.5% y/y however, indicating that most the upside surprise was due to energy (24.7% m/m as the regulatory price cap rose) and food (16.2% y/y) costs. While many analysts believe that inflation may have now peaked, the data puts pressure on the Bank of England to maintain a faster-than-normal pace of rate hikes with a 50bp hike priced in for December. All eyes will be on the Autumn budget statement today where Chancellor Hunt is expected to raise taxes and cut spending to plug a GBP 54bn budget hole over the next few years.
• US retail sales also came in stronger than forecast, up 1.3% m/m in October. Excluding vehicles and petrol, sales were up 0.9% m/m (median forecast of 0.2%) and the September reading was revised higher to 0.6% m/m, double the initial estimate. The US consumer appears to be in good shape despite the sharp rise in interest rates this year. In contrast to the strong consumer data, industrial production in the US fell -0.1% m/m, weaker than expected, and the September data was revised lower as well. Capacity utilization slipped to under 80% last month.
• Initial discussions in the ECB’s governing council are leaning towards a 50bp hike at next month’s meeting unless there is a surprise acceleration in inflation before then, according to reports by Bloomberg. The council is also weighing recession risks and the prospect of balance sheet reduction. 
• Japan’s trade deficit widened in October as imports rose 53.5% y/y against export growth of 25.3% y/y. High global energy and commodity prices and the much weaker yen were the main drivers of the high import growth.

Key Economic Data and Events

• 14:00 Eurozone CPI (final, Oct) forecast 10.7% y/y
• 17:30 US Housing starts (Oct) forecast -2.0% m/m (1410k)
• 17:30 US initial jobless claims (Nov 12) forecast 228k

Fixed Income

• US Treasuries ended the day mixed with some better-than-expected retail sales numbers offset by poor industrial production data. Yields on the 2yr UST closed up by about 2bps at 4.3549% while the 10yr US Treasury soared with yields down about 8bps to 3.6899%. Christopher Waller, a governor of the Federal Reserve, said overnight that the slew of recent data made him “comfortable considering stepping down to a 50bps hike.” Mary Daly, from the San Francisco Fed, pitched the terminal rate for the Fed at somewhere between 4.75%-5.25%.
• UK gilts rallied ahead of today’s budget statement, even after inflation in the UK spiked again in October. Yields on the 10yr gilt dropped about 15bps to 3.136% even as the inflation picture looks to set the Bank of England up for further hikes ahead. European bonds generally were bid overnight with 10yr bund yields down 11bps at 1.992% and both French and Italian bonds gaining.
• High-yield and emerging market USD-denominated bonds received a pick up yesterday even as other risk assets sank.

FX

• Currency markets were a little driftless overnight although with a bias toward a weaker dollar. EURUSD managed to gain about 0.4% overnight to settle at 1.0395 while GBPUSD added about the same amount to close at 1.1914. Both pairs are tending lower in early trade today. USDJPY, by contrast, moved against the yen, rising by 0.2% to 139.50.
• Commodity currencies were more uniformly negative with USDCAD adding 0.4% to 1.3329 while AUDUSD dropped 0.2% to 0.6741 and NZDUSD was essentially flat at 0.6151.

Equities

• Hawkish comments from Fed officials weighed on US equity markets following a previous bout of optimism. The NASDAQ dropped -1.5%, followed by the S&P 500 which lost -0.8%. Losses on the blue chip Dow Jones were less severe at -0.1%.
• Geopolitical tensions weighed on European equities earlier in the day, as Germany’s DAX dropped -1.0%. The FTSE 100 ended the day down -0.3% and the CAC -0.5%.
• Locally, the DFM dropped -0.9% and the ADX -0.4%. Saudi Arabia’s Tadawul closed up 0.5% while Egypt’s EGX 30 added 1.7%.

Commodities

• Geopolitical tensions seemed to ease quickly over the crashing of missiles in a town in eastern Poland. Oil markets then can turn back to the recession narrative with both major benchmarks falling; Brent futures down by 1.1% at USD 92.86/b and WTI falling by 1.5% to USD 85.59/b.
• US oil inventories fell sharply last week with a 5.4m bbl decline in commercial stocks coming on top of a 4.1m bbl drop in SPR inventories. Gasoline inventories were higher, up by 2.2m bbl, while distillate stockpiles added 1.1m bbl. US oil production was flat at 12.1m b/d.

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