Bank of England’s credibility on the line

written on October 12, 2022

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities finished mixed on Tuesday after turning to the downside following news that the Bank of England set a three-day deadline to end its bond buying initiative and for pension funds within the UK to rebalance. Action was choppy for most of the day, as investors looked ahead to today’s first glimpse of the highly anticipated September inflation data, courtesy of the Producer Price Index (PPI). The Dow Jones increased by 0.1%, while the S&P 500 Index fell 0.7%, and the Nasdaq shed 1.1%. European equity markets also closed broadly lower, with the Euro Stoxx 50 Index down 0.5% for the day. 

Summary

  • Asian equity markets stayed at two-year lows on Wednesday with the exception of the Australian market which wobbled around the flatline as technology and commodity losses offset bank gains.  
  • European equities are set for further declines this morning as US futures are up slightly ahead of key inflation data and the release of the minutes from the last Fed meeting. 
  • Oil prices fell for a third straight session in early morning trade as investors fretted about a hit to fuel demand, growing risks of a global recession, and tightening Covid-19 curbs in China. 
  • Treasury yields in the US ended mixed yesterday after returning to action following Monday’s holiday, as the yield on the 2-year Treasury note was down 2 basis points (bps) to 4.29%, while the yield on the 10-year note gained 4 bps to 3.93%, and the 30-year bond rate rose 6bp to 3.90%. 
  • The Bank of England told lenders it was prepared to extend its emergency bond-buying program past the 14th October end-date if market conditions demanded it, the Financial Times reported this morning. The report came after Governor Andrew Bailey put the Bank’s credibility on the line with a pledge yesterday to end emergency gilt purchases as scheduled. 
  • The International Monetary Fund cut its 2023 global growth forecast from 2.9% to 2.7%, warning that pressures from inflation, war-driven energy and food crises, and higher interest rates may tip the world into recession and financial market instability. Its GDP estimate for this year remained steady at 3.2%, which was down from the 6% seen in 2021. On the price front, global inflation is forecasted to rise to 8.8% in 2022 but to decline to 6.5% in 2023 and to 4.1% in 2024. 
  • US President Joe Biden said he does not believe there will be a recession in the near future and if there is, he expects it to be a “slight” economic dip.  
  • Shares of ride-hailing companies like Uber and Lyft, as well as online food-delivery firms such as DoorDash, closed deep in the red yesterday in the wake of a proposal by the Labour Department to make it easier to classify so-called “gig workers” as employees rather than contractors. Labour experts and activists contend that the current status of these workers deny them important protections, such as health-care benefits and overtime pay.  
  • LVMH beat market forecasts in Q3, positing a sharp rise in sales as wealthy shoppers splashed out on fashion and Americans in Europe made the most of the strong dollar, allowing the board to express confidence in continued growth for the luxury retailer. Results got an added boost from improved business in China as Covid-19 curbs eased. 
  • Deutsche Post said it expects to raise its full-year profit forecast when it releases its Q3 figures on 8th November. The company benefited from a recovery in e-commerce volumes in its business-to-consumer segment after a decline in the first half of the year and easing capacity issues in ocean and air freight markets. 

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