BoE keep rates unchanged

The Bank of England elected to keep interest rates unchanged at yesterday’s policy meeting. Consensus expectations had been for a 25bps rise, despite an unexpected improvement in Wednesday’s headline and core CPI readings for August. The voting was however close, with 5 members in favour of holding rates unchanged and 4 voting for a 25bps hike. The decision leaves the bank rate at 5.25%. The accompanying statement from the Bank of England highlighted that the committee would be open to further rate hikes if “if there was evidence of more persistent inflationary pressures”. The statement also emphasized that rates may need to remain at elevated levels for some time to come.  There was additionally a unanimous agreement to increase the pace of quantitative tightening from £80bn in 2022-23 to £100bn in 2023-24.

The Turkish central bank hiked its one-week repo rate by 500bps at its September meeting, taking the benchmark rate to 30.0%, in line with consensus projections. There has now been a cumulative 2,150bps of hikes over the past four meetings as the bank has looked to stifle accelerating price growth – with CPI inflation at 58.9% y/y in August. The central bank has followed a more orthodox monetary policy since the appointment of Hafize Gaye Erkan in June, and President Erdogan has said that he is supportive of the monetary tightening.

The Central Bank of Egypt kept its benchmark interest rates on hold yesterday, with the overnight deposit rate staying at 19.25%.  Headline CPI inflation has been at new record highs over recent prints, hitting 37.4% in August after 36.5% in July, but there have been some indications that inflation has peaked, with core inflation slowing over the past two months. Inflationary pressures will likely continue to ease through the coming months as previous currency moves pass through the base, meaning that the CBE’s hiking cycle is likely done for now.

In the US, the number of initial jobless claims in the week ending 16 September dropped 20k to 201k, significantly below consensus expectations. The number of continuing claims also declined to 1.66m in the week ending 9 September, from 1.68m the week prior. The declines in both initial and continuing claims took the series to their lowest levels since the start of the year. While the pace of new hiring appears to have moderated in recent months, as seen in the NFP numbers, there doesn’t currently appear to be a sizeable uptick in layoffs.  

The US conference board leading indicator declined 0.4% m/m in August, following a 0.3% fall in July. This was the 17^th consecutive decline in the leading indicator, and was driven by weak new orders, tight credit conditions, high interest rates and weak consumer confidence.  

A provisional reading of the European Commission’s measure of Eurozone consumer confidence declined by more than had been expected, to reach a reading of -17.8 in September from -16 in August. The confidence measure continues to fall further below its long-run average, reflecting weakness in economic activity in the bloc. 

Headline Japanese CPI for August rose 3.2% y/y, higher than expectations for a 3% y/y rise. CPI excluding energy prices and fresh food rose 4.3% y/y. Despite the higher than anticipated inflation print, the Bank of Japan is nonetheless expected to maintain its ultra-easy policy stance at their meeting today.

Today’s Economic Data and Events

• 10:00 UK retail sales August: Forecast 0.5% m/m
• 11:15 FR HCOB composite PMI Sept: Forecast 46
• 11:30 GE HCOB composite PMI Sept: Forecast 44.7
• 12:00 EC HCOB composite PMI Sept: Forecast 46.5
• 12:30 UK S&P Global/CIPS composite PMI Sept: Forecast 48.7
• 17:45 US S&P Global composite PMI Sept: Forecast 50.4

Fixed Income

• Longer dated US Treasury yields rose on the back of stronger than expected unemployment claims data, with markets concerned about how long rates will need to stay high. The 10yr yield rose 9bps to reach 4.494%. In contrast the 2yr yield fell 3bps to reach 5.144%.
• Increases in yields were also seen across longer-dated European bonds. The 10yr UK Gilt yields rose 8bps to 4.293% while the 10yr Bund yield was up 4bps to reach 2.732%.

FX

• There was a sharp fall in GBPUSD, following the surprise BoE decision to keep rates unchanged. GBPUSD fell 0.37% to 1.2298. EURUSD was unchanged by the end of Thursday at 1.0661.
• Commodity currencies were mixed against the dollar on the day. USDCAD rose 0.16% to 1.3483, AUDUSD fell 0.5% to 0.6416 and NZDUSD rose 0.03% to 0.5931.

Equities

• US markets saw the biggest slump in six months as they digested the higher-for-longer narrative out of the Fed on Wednesday night. The Dow Jones, the S&P 500, and the NASDAQ fell 1.1%, 1.6%, and 1.8% respectively.
• There was similar selling earlier in the day in Europe. A surprise hold by the Bank of England saw the FTSE 100 drop just 0.7%, but the DAX lost 1.2% and the CAC 1.6%.
• Locally, the ADX added 0.2% and the DFM gained 1.0%.

Commodities

• After gaining three weeks in a row, oil prices look set to record a weekly loss this week as the hawkish narrative out of the Fed has overshadowed the concerns around market tightness that had been driving prices higher.
• Brent futures fell 0.3% to USD 93.3/b while WTI dropped 0.7% to USD 89.6/b, although both benchmarks are gaining ground once again this morning.