US data continues to run hot and cold

US durable goods orders for August came in largely as expected with a modest 0.2% decline month/month. Commercial aircraft were largely responsible for the decline as the more critical core capital goods orders performed better than anticipated, rising by 1.3% m/m in August, its strongest print since January this year. While many indicators from the US economy are showing signs of slowdown, there are just as many that are pointing to resilience to interest rate hikes and high inflation.

As a case in point to the relative resilience in the US economy, consumer confidence improved in September for a second month running according to an index published by the Conference board. Overall consumer confidence hit 108 this month, up from 103.6 a month earlier and came in at its strongest level since April. Falling gasoline prices may be helping to inure consumers to high prices elsewhere given their high visibility and more regular consumption. However, there were some signs that high interest rates are biting into major purchases with plans for home purchases falling. That said, new home sales did increase in August by 29% on an annualized basis to 685k. This cloudy outlook in the economic data for the US will not make the Fed’s call on whether the economy is actually veering to recession any easier though it seems that the focus from the central bank remains entirely on the inflation battle.

Huw Pill, chief economist of the Bank of England, said that a “significant monetary policy response” was needed following the gyrations in UK markets in the last few days after the government outlined its substantial tax cut programmes. Following on from the statement yesterday from the BoE, Pill seemed to push back against expectations for an emergency rate hike, preferring to act at the next scheduled MPC meeting in November. In a more biting critique for the government, Pill also noted that it was “crucial” for policymaking to remain credible and that “all actors…are both respected in terms of what their responsibility is and their objective and intentions are.”

King Salman bin Abdulaziz, ruler of Saudi Arabia, has appointed his son, Mohammed bin Salman, as prime minister of the kingdom. Mohammed bin Salman is already the crown prince of Saudi Arabia and his appointment as prime minister formalizes his role as head of government but may not presage any change in policies.

Bank al-Maghrib, Morocco’s central bank, hiked policy rates by 50bps to 2% as the country deals with elevated inflation. Headline CPI in the North African economy rose by 8% y/y in August, its highest level in data going back to 2008. The central bank had so far resisted hiking rates but indicated that it saw a “higher level of inflation for 2022” and a “less pronounced downturn” next year. Bank al-Maghrib forecasts a slowdown in Morocco’s economy this year to growth 0.8% before a recovery of 3.6% next year, slower than previous projections.

Today’s Economic Data and Events

• 10:00 GE GfK consumer confidence October: forecast -39
• 18:00 US pending home sales August: forecast -1.5% m/m

Fixed Income

• After some early consolidation with yields holding steady, gilt markets took another steep dive over the rest of the trading day overnight with the 2yr yield up 16bps to 4.555% and the 10yr yield adding 26bps to 4.498%. The UK received additional warnings from the IMF on its unfunded tax cuts, criticizing the moves as likely to deepen inequality in the country.
• US Treasuries closed the day mixed, reacting to hawkish commentary from St Louis Fed president James Bullard. The 2yr UST yield dropped about 6bps overnight to 4.2829% while the 10yr rose by 2bps to 3.9451%.

• Charles Evans, president of the Chicago Federal Reserve, said that the Fed funds rate may peak by March next year after which the Fed may “sit and watch how things are behaving” and that they could move rates lower if inflation slows. Like other Fed speakers, Evans did not specifically articulate that a recession could occur but noted that “there could be some shocks” in reference to employment.
• James Bullard, from the St Louis Fed, said yesterday that inflation was “a serious problem and [the Fed] need to be sure to respond to it appropriately.” He also seemed to back up Fed chair Jerome Powell’s assessment that rates needed to be at a restrictive level for longer to ‘un-entrench’ inflation from the economy. Powell was also speaking overnight though his comments were largely related to regulations in crypto markets.

FX

• Cable recovered modestly overnight, more in response to how far it had fallen than any substantial positive news on the UK. GBPUSD closed up 0.4% at 1.0733 though has already reversed all those gains to trade lower by nearly 0.6% this morning. EURUSD managed a more modest drop overnight, down by 0.16% to 0.9594 though it is also falling in early trade today. USDJPY was steady at 144.80.
• Commodity currencies were relatively steady with both CAD and NZD holding more or less unchanged on the day, though with a slightly positive bias. AUDUSD dropped, however, down by 0.33% to 0.6435.

Equities

• Equity markets remained in the red overnight though the pace of declines looks as though it is moderating. The Dow dropped by 0.4% overnight while the S&P dipped by 0.2%. The NASDAQ actually managed a decent pick up, rising by 0.25%.
• European markets were all negative though with the FTSE failing to get any benefit on the back of a weaker pound. The FTSE 100 fell by 0.5% overnight with the EuroStoxx 50 index closed lower by 0.4%.

Commodities

• Oil prices closed higher overnight as markets expect that OPEC+ will step in with a production cut at their meeting next week. Russia appeared to endorse such a move, calling for a 1m b/d cut in output targets. Brent futures added 2.6% to settle at USD 86.27/b while WTI rose by 2.3% to USD 78.50/b.
• The API reported a 4.1m bbl build in crude oil inventories last week while gasoline stockpiles dropped. Official EIA data will be released later today. Markets will also be tracking the movements of Hurricane Ian which will make landfall in the Gulf of Mexico, likely forcing some production offline.

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