UK prime minister Liz Truss resigns

Liz Truss resigned as prime minister of the UK, capping weeks of political instability in the country. After a harsh market rejection of her government’s initial economic plan, outlined by her then chancellor Kwasi Kwarteng, and repeated unwinding of her economic agenda, Truss seemed to accept that she had lost control of the Conservative Party, even after appointing Jeremy Hunt as chancellor to steady conditions. The Conservative Party will try to select a leader in a quick process to have a prime minister in place potentially by the end of the month. Market reaction was initially positive with both gilts and sterling rallying but over the course of the day further political uncertainty weighed on markets.

The Turkish central bank cut its one-week repo rate by 150bps yesterday, taking the benchmark rate to 10.50% and confirming the TCMB’s position as a global outlier as it continues to cut rates while most of the world’s central banks are hiking. The move was greater than the 100bps cuts implemented at the previous two meetings and sets the bank on course to achieve single-digit interest rates by year-end, in line with President Erdogan’s aims. The cut leaves real interest rates in even deeper negative territory (CPI inflation was 83.5% y/y in September) but the bank reiterated its expectation that disinflation will start ‘on the back of measures taken and decisively implemented for strengthening sustainable price and financial stability along with the resolution of the ongoing regional conflict’, and the focus appears resolutely focused on growth at present. 

CPI inflation in Morocco picked up to 8.3% y/y in September, up from 8.0% in August. Prices were 1.0% higher m/m, compared to 0.3% previously. Inflation has accelerated rapidly this year on the back of the global pressures and a local drought after having been low and stable previously – price growth averaged 1.5% over the 15 years prior and seldom rose above 2.0% in that period. While some of the headline inflationary pressures should ease, the Bank al-Maghrib noted after its September MPC meeting that ‘the latest available data show a broad spread to non-tradable products prices.’

US initial jobless claims for the week ending October 15 fell by 12k to 214k, their lowest level in the last three weeks. Even as the US economy endures much tighter monetary policy, labour conditions still appear strong enough to support decent levels of consumption in the final months of 2022. Continuing claims did tick higher, up to 1.39m in the week ending October 8.

Existing home sales in the US fell for an eighth month in a row, its longest stretch of declines since 2007. Total sales fell 1.5% to an annualized pace of 4.71m in September with housing market officials warning that the market will weaken further from here. The housing market is the most evident example of a weakening US economy so far.

Today’s Economic Data and Events

• 10:00 UK Retail sales Sept: forecast -0.5%
• 18:00 EC Consumer confidence Oct: forecast -30

Fixed Income

• US Treasuries showed a momentary rally along with gilts on news that UK prime minister Liz Truss had resigned, perhaps prompting the selection of a leader hewing to more economic orthodoxy. However, a sell off resumed later in the day with yields on the 2yr UST breaking above the 4.6% handle, adding 5bps to 4.61%. The 10yr UST yield added nearly 10bps to close at 4.2283%.
• Despite an initial positive reaction, gilt markets did eventually sell off as the uncertainty of who will be selected as prime minister weighed on markets. The 10yr gilt yield added 3bps at the close to settle at 3.895% but that disguised around a 15bps move from lows hit in the middle of the day.

FX

• In currency markets attention was on the UK where sterling popped higher to almost 1.135 in response to the resignation of Liz Truss as prime minister. However, those gains were faded quite quickly over the day and GBPUSD managed to settle at 1.1235, up 0.14%. EURUSD added 0.13% to 0.9786 while USDJPY has broke through the 150 level, closing at 150.15 overnight.
• Commodity currencies were generally positive with USDCAD closing unchanged at 1.3765 and AUDUSD up 0.18% to 0.6281.

Equities

• The FTSE 100 saw only a modest 0.3% gain following the announcement of Liz Truss’s resignation yesterday, compared with 0.2% by the DAX and 0.7% by the CAC. The more domestically focused FTSE 250 enjoyed a bigger 0.8% gain however.
• In the US, hawkish comments from Fed officials alongside some weak earnings results weighed on equity markets. The Dow Jones, the NASDAQ and the S&P 500 dropped -0.3%, -0.6% and -0.8% respectively.
• Locally, the DFM added 0.3% and the ADX 0.6%.

Commodities

• Oil prices closed mixed overnight with Brent futures settling essentially unchanged at USD 92.38/b and WTI up 0.5% to USD 85.98/b. We would expect focus to increasingly turn to the EU’s plan to cut itself off from Russian imports entirely by the start of December and the potential introduction of a price cap. If Russia follows through on its plan to not sell to countries participating in the cap then oil markets could tighten substantially in the final month of the year.

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