2022

GBP: The risk of a two-year recession in Britain, flagged last week by the Bank of England, underscores the high stakes for Prime Minister Rishi Sunak and his finance minister Jeremy Hunt as they prepare to announce major tax increases and spending cuts. The BoE said on Thursday that Britain’s economy would shrink for eight three-month quarters in a row – the longest such run in at least a century – if interest rates go up by as much as financial markets have been expecting recently. That would be a longer and shallower economic contraction than the ones that followed the COVID-19 lockdowns and the global financial crisis of 2007-09. Ultimately, the backdrop of high inflation this time is limiting the policy options available to the government. In fact, even if borrowing costs do not rise any further at all, the BoE’s forecasts still paint a grim picture of an economy contracting in five of the next six quarters under the strain of a tight cost-of-living squeeze.

EUR: The Euro fell in early European trade this morning as market participants closed their positions after the Euro marked its biggest weekly gain since late 2015 against dollar; however, risks continue to surround the common currency. In fact, despite German industrial production surprising to the upside – where industrial output in the Eurozone’s largest economy grew by 0.6% on the month in September – these increases were offset by a 0.9% month-on-month fall in output in energy-intensive branches of industry. Ultimately, supply chain bottlenecks stemming from the war in Ukraine continued to hamper the country’s wider industrial sector, particularly in processing orders where last week’s data showed a 4% slump.

USD: The dollar tumbled on Friday after the U.S. nonfarm payrolls report for October showed the world’s largest economy created more new jobs than expected, but also flashed signs of a slowdown with a higher unemployment rate and lower wage inflation. The greenback initially rose immediately after the data, but fell as market participants digested the jobs report, noting the data was not all positive and supports the view the Federal Reserve could slow the pace of future rate hikes. However, the U.S. dollar retraced some of its losses in early European trade this morning as risk sentiment was on the wane following China’s affirmation on its commitment to a zero-COVID policy. Nonetheless, gains are limited as traders cautiously await the release of key U.S. inflation data on Thursday, which could provide more clues as to the Federal Reserve’s hiking intentions in December, as well as the political ramifications from the midterm elections on Tuesday where control of Congress and President Joe Biden’s agenda for the remaining two years of his term are at stake.

The Federal Reserve and the Bank of England are all but certain to deliver jumbo 75-basis point rate hikes on Wednesday and Thursday, respectively, as the battle against sky-high inflation continues. However, with investors now on the lookout for signs that aggressive monetary tightening could start to slow, today’s Eurozone inflation report and Friday’s U.S. jobs report for October will be in the spotlight.

GBP: The Bank of England looks set to raise interest rates by 75-basis points on Thursday; its eighth consecutive rate increase as it battles inflation currently running above 10%. Expectations for a full percentage-point rate hike were trimmed back last week after new Chancellor of the Exchequer Jeremy Hunt reversed almost all of former Prime Minister Liz Truss’s planned tax cuts and shortened her energy cap program to six months from two years. However, the delay of the first budget plan of the new government until Nov. 17^th will make it harder for the BoE to spell out its economic forecasts. Furthermore, after delays caused by recent financial market turmoil, the BoE is also due to start selling bonds from its stimulus stockpile on Tuesday.

EUR: The Eurozone is set to release its flash inflation estimate for October today which is expected to come in at a record high of 10.2%. In fact, in a move to anticipate the extremely high reading, last Thursday the European Central Bank delivered its second 75-basis point rate hike in a row. Furthermore, subsequent remarks by policymakers indicated that it would continue tightening in the coming months in order to prevent inflation from becoming entrenched, despite fears over a looming recession. The euro area is also to release preliminary GDP figures for the third quarter, which are expected to show a small expansion, but most economists anticipate the bloc’s economy to enter contraction territory in the fourth quarter.

USD: The Fed is widely expected to raise interest rates by 75-basis points for a fourth straight time at the conclusion of its two-day policy meeting on Wednesday. Investors instead will be looking to Fed Chairman Jerome Powell for any hints that the future pace of hikes could slow after recent softer economic data. Financial markets are currently pricing in a smaller 50-basis point rate hike at the Fed’s December meeting and another 50-basis points over the first two meetings of next year. However, betting on a less hawkish Fed has been a risky strategy so far this year. Stocks have repeatedly rebounded from lows amid hopes for a so-called “Fed pivot”, only to be pressured lower again by persistently high inflation and aggressive monetary tightening. For now, the tone of Wednesday’s Fed press-conference and Friday’s October U.S. nonfarm payrolls report will likely be key in helping investors set expectations ahead of the central bank’s December meeting.

GBP: Last week’s reports that the British government is preparing to do a major U-turn on planned tax cuts have helped ease fears over public finances. In fact, Kwarteng was dismissed by Truss on Friday as she tried to salvage a premiership that is less than two months old by reinstating a planned increase in corporate income tax that Kwarteng had scrapped. However, the Gilt market had continued to sell off, after Truss stood by most of Kwarteng’s other measures. Nonetheless, new British finance minister Jeremy Hunt will announce tax and spending measures later today – two weeks earlier than previously scheduled – after the original economic plan put forward by Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng roiled financial markets. Additionally, British government bonds will resume trading without the support of the Bank of England’s emergency bond-buying program, which ended last Friday. That said, any stock market gains are likely to be limited as investors continue to survey the deteriorating economic outlook, as well as a continuation of tightening monetary policies around the world. Furthermore, investors will also be looking at Wednesday’s U.K. inflation data for September, which is expected to hit double digits amid a cost-of-living squeeze while retail sales figures on Friday are expected to point to a decline in consumer spending.

EUR: European stock markets are expected to open marginally higher, helped by plans from the U.K. government to shore up confidence in its fiscal policies after weeks of turmoil. Looking forward, the economic data slate is largely empty, but Italian consumer prices are expected to remain elevated in September, climbing 8.9% on the year. Many analysts expect this to add further pressure on the European Central Bank to continue hiking interest rates. Ultimately, ECB policymakers Luis de Guindos and Philip Lane are set to speak at different events later today, and their comments will be studied for clues of future moves.

USD: In the wake of last week’s hotter-than-expected U.S. inflation data, focus will turn to the housing market with reports due on building permits, housing starts and existing home sales. The economic calendar also includes reports on industrial production, manufacturing index, and initial jobless claims. Regional Fed presidents Neel Kashkari, Charles Evans and James Bullard are also due to make what will be closely watched appearances. Ultimately, Bullard said last week’s CPI figures showed that inflation had become “pernicious” and left the door open to 75-basis point rate hikes at the Fed’s upcoming meetings in November and December but added that it was too early to make that call.

As global investors have repeatedly had their hopes dashed by the Federal Reserve for a pivot away from an aggressive rate hike campaign, many market participants will be keenly awaiting the latest U.S. inflation numbers this Thursday for further guidance on upcoming rate hikes.

Wednesday’s minutes of the latest Fed meeting should offer some insights into how officials view the economy and the inflation outlook. Comments during the week by several Fed policymakers will also be closely watched. Elsewhere, big bank earnings on Friday are expected to show the impact of rising interest rates and market volatility, whereas oil prices remain in the spotlight after OPEC+ announced its largest supply cut since 2020 and in the U.K. a barrage of economic data seems set to test the recovery in sterling.

GBP: The Bank of England’s Financial Policy Committee is set to publish meeting minutes on Wednesday. The committee oversaw last month’s emergency intervention to stabilize bond markets after the government’s “mini-budget”, and the minutes may give some insight into the risks facing pension funds and the implications of sharply higher mortgage rates. The U.K. is also set to publish employment data for August on Tuesday, followed a day later by GDP figures for August along with data on industrial output and the trade balance. Weak economic data could add to pressure on the government to deliver longer-term growth plans. Ultimately, investors are betting on the BoE hiking interest rates by a full percentage point at its next meeting in November to tackle an inflation rate currently touching 10%.

EUR: ECB member and Bank of France head Francois Villeroy de Galhau announced this morning that the European Central Bank is engaged in bringing down inflation to 2% percent in “two to three years” from now. He reiterated that “close to 2%” was still the right target monetary policymakers at the ECB and elsewhere should pursue, adding that the eurozone was still far from it. In fact, Eurozone inflation accelerated to 10% last month. Ultimately, this morning’s comments sent a very strong signal to all economic players that the ECB is set to bring down inflation to the aforementioned target within the next couple of years.

USD: The dollar held its ground on Monday as investors set their sights on data later in the week that is expected to show red-hot inflation after a strong U.S. labour market reinforced bets on higher interest rates. Another elevated inflation reading on Thursday would underline the case for even more hawkishness from the Fed after last Friday’s jobs report indicated that the labour market remains robust despite the Fed’s efforts to bring down high inflation by weakening growth. While economists expect the headline rate of inflation to moderate, core inflation, which strips out food and fuel costs, is expected to accelerate in September, keeping the Fed on track for a fourth consecutive 75-basis point rate hike in November. The economic calendar also features data on consumer sentiment which should show how U.S. consumers are faring after months of tighter monetary policy, along with data on initial jobless claims and wholesale price inflation.

A tumultuous year for financial markets is entering the final stretch, with the ongoing Russian-Ukraine war, Britain battling a self-inflicted crisis and markets pouring over U.S. jobs data to determine how much of an impact Fed hike are having on the U.S. economy.

GBP: Following some of the most turbulent weeks for the UK and the British pound, newly elected Prime Minister Liz Truss was forced into a humiliating U-turn this morning, reversing plans to cut the highest rate of income tax that helped spark a rebellion in her party and turmoil in financial markets. Truss and finance minister Kwasi Kwarteng announced a new “growth plan” on Sept. 23^rd that would cut taxes and regulation, funded by vast government borrowing to snap the economy out of years of stagnant growth. But the plan triggered a crisis of investor confidence in the government, hammering the value of the pound and government bond prices and jolting global markets to such an extent that the Bank of England had to intervene with a £65 billion ($73 billion) programme to shore up the markets. While the removal of the top rate of tax only made up around £2 billion out of a £45 billion pound tax-cutting plan, it was the most eye-catching element of an unfunded fiscal plan. The decision to reverse course is likely to put Truss and Kwarteng under huge pressure, less than four weeks after they came to power. Ultimately, from a market’s perspective, it is a good step in the right direction: although it will take time for markets to buy the message, it should ease some of the pressure off the British pound.

EUR: European stock markets are expected to open in a mixed fashion this morning as investors digest renewed regional energy concerns and political turmoil in the U.K.. The European Union energy ministers announced plans on Friday to introduce windfall profit taxes on energy firms, and EU leaders are set to meet at the end of the week to discuss how to step up support for Ukraine and their joint next steps to tame soaring energy prices. In the meantime, market participants are now expecting the European Central Bank to announce another hefty interest rate rise later this month after data on Friday showed that Eurozone inflation beat forecasts, climbing to a record high of 10% in September. Ultimately, Germany’s €200 billion plan to protect companies and households, which includes a gas price brake and a cut in sales tax for fuel, came as gas and electricity costs jumped, caused largely by a collapse in Russian gas supplies to Europe, and followed the continuously increasing inflation results.

USD: As the dollar consolidates near all-time highs, investors will be looking closely at this Friday’s U.S. jobs report to assess how much impact the Federal Reserve’s rate hikes are having on the economy. Several Fed officials are also due to speak during the week, as markets try to gauge their appetite for another 75-basis point rate hike at the bank’s November meeting. Economists are expecting the U.S. economy to have created 250,000 jobs last month, with the unemployment rate holding steady at 3.7% and wage growth staying elevated. Recent jobs data have indicated that the labour market remains robust despite a series of jumbo-sized rate hikes. In fact, another strong jobs report could underline the case for even more hawkishness from the Fed, potentially roiling markets already hard hit by worries over how high rates may have to rise as the central bank battles the worst inflation in forty years. On the other hand, indications that the labour market is slowing could add to fears that aggressive Fed tightening risks tipping the economy into a recession. In the meantime, U.S. equity markets look set to remain volatile after closing the books on their third straight quarterly decline last Friday. Attention later in the day will be on September data for the U.S. ISM manufacturing index. Nonetheless, it is unlikely to dent optimism around the US economy that has been building up further with positive economic indicators released over the last few weeks.

GBP
The Pound experienced extreme volatility on Friday after the release of Kwarteng’s ‘Mini-Budget’. The market reacted negatively to the Tax-Cuts, meant to incentivise growth in the UK. Unfortunately, the bad news doesn’t stop there, as Sterling hit an all-time low against the USD as trading began this morning dropping a total of 75 since the markets opened on Thursday. A similar trend can be seen with GBP/EUR, as the Pound continues to weaken against the Euro this morning. The reduced confidence in Sterling is backed by Kwarteng’s statement on Sunday informing the UK that he would be pursuing more Tax Cuts.

EUR
The Euro has fallen against the strength of the US Dollar Since trading began on Friday. The gain against Pound Sterling can be tied to investors pulling funds out of the UK and reinvesting them abroad. ECB President Lagarde is expected to speak for the next three days – along with other ECB members – bringing added volatility to the Euro. German retail sales are released on Friday morning, before Eurozone HICP (a measure of changes in the price of goods and services) in the afternoon, both of which could stimulate end-of-week volatility.

USD: The Dollar has seen a huge increase in strength against both GBP & EUR. As the US continues to increase Interest rates and tow the line between Recession & inflation, the dollar remains King. US Treasury Bonds have continued to soar with the prospect of additional interest rate hikes from the FED. The added confidence in the greenback has seen the Safe-haven currency climb to a new two-decade high against a basket of major currencies – and an all-time high vs GBP.

Markets started September on a strong note, with major global indices closing the first week in the green. An additional push in positive market sentiment has been the most recent development in Eastern Europe: in fact, this weekend served as a reminder of the ongoing and changing nature of the Russia-Ukraine war.

Nonetheless, whether the strong start to the month was just a market positioning adjustment or the sign of anything more sustained will be on watch this week, especially as a new set of inflation reports comes out. In fact, a bevvy of consumer price index (CPI) reports for August come out this week: Germany, Spain, and the U.S. all release on Tuesday, the U.K. releases its report on Wednesday, France releases its report on Thursday, and Italy and the Eurozone as a whole release theirs on Friday.

GBP
The Bank of England, whose meeting was due this week, postponed its interest rate decision last Friday in the wake of Queen Elizabeth II’s passing. It’s the first delay to a monetary policy meeting since the central bank became operationally independent 25 years ago. Moreover, the central bank faces a more fluctuating environment with new Prime Minister Liz Truss in charge and already having issued a major energy plan. Its effect on the market is among the things the BOE will have to weigh. Nonetheless, postponing their interest rate decision would allow policy setters to gather more economic data. In fact, having witnessed a contraction of 0.6% in economic activities during June 2022, market players will be interested in July’s monthly GDP figures to confirm the recently hawkish hopes from the Bank of England. Forecasts suggest that the UK GDP will reverse the previous drop with 0.5% MoM in July. Meanwhile, Manufacturing Production, which makes up around 80% of total industrial production, is expected to improve to 0.6% MoM in July.

EUR
European stock markets are expected to open with modest gains today, continuing the positive trend seen at the end of last week, helped by the substantial territorial gains made by Ukrainian troops over the weekend. Ukraine has retaken more than 3,000 sq. km this month, with most of this ground being taken thanks to a rapid weekend offensive that forced Russia to abandon its main logistics hub in the Kharkiv region. After months of stalemate, these swift manoeuvres will give the markets room to reconsider the range of outcomes. Prolonged attrition remains one option, but an earlier-than-expected end to the conflict has entered the equation. Ultimately, European markets closed last week with healthy gains as September started on a positive note, and this tone is expected to continue.

USD
The main point of focus this week is U.S. consumer price inflation data due on Tuesday, which is largely expected to dictate the path of the dollar in the near term. Markets are expecting inflation to retreat further from highs hit earlier this year, helped largely by easing fuel prices. Nonetheless, the reading is still expected to be well above the Federal Reserve’s annual target of 2%. Ultimately, this could give the Federal Reserve food for thought ahead of next week’s policy-setting meeting, with the U.S. central bank expected to deliver its third consecutive rate increase of 75 basis points in an attempt to curb this high inflation.

Queen Elizabeth II, the longest reigning monarch in British history who had recently celebrated her platinum Jubilee this year, marking 70 years on the throne, has peacefully died aged 96, Buckingham Palace announced on Thursday. Following her death, the Queen’s eldest son Charles, the former Prince of Wales, will become King in a formal ceremony in London and lead mourning services across the United Kingdom.

‘Her legacy will loom large in the pages of British history, and in the story of our world’ – Joe Biden

European and UK stock markets are expected to open sharply lower today, as investors fret over the economic risks facing the region, including geopolitical developments, further energy shortages, and slowing growth coupled with soaring inflation.

In fact, the escalating energy row between Moscow and the West is set to occupy investors’ attention in the week ahead after Moscow vowed to keep its main gas pipeline to Germany shut. Nonetheless, UK political development will most likely be under the spotlight in the first half of the week as Monday and Tuesday will see the announcement and appointment of the UK’s new prime minister. Additionally, the European Central Bank and Christine Lagarde are set to deliver a big rate hike on Thursday whereas Federal Reserve Chair Jerome Powell is due to make an appearance before the central bank goes into its blackout period before its next meeting at the end of the month.

GBP
The UK prepares for an important day today as the Conservative Party will unveil their new leader, with Liz Truss being the overwhelming favourite. Whereas tomorrow, Tuesday 6th September, the new PM will officially take office after being appointed by the Queen to succeed Boris Johnson. Their roadmap to the UK’s current economic headwinds will be key: extra support for businesses and households will be of utmost importance with Brexit issues also expected to return to the forefront if Truss wins. Nonetheless, Ahead of the Tory party’s leadership announcement, there will be some financial news releases. In fact, investors will be looking for more meat on the bone in terms of commentary on current trading and the outlook for the rest of 2022. UK services sector PMI data will be of interest, mid-morning, but may be drowned out by the headlines from Westminster.

EUR
The Euro seems set for a very volatile and turbulent week losing ground in early trading hours this morning. The standoff over Russian gas and oil exports escalated Friday after Moscow vowed to keep its main gas supply pipeline to Germany shuttered. The latest Nord Stream pipeline shutdown, which Russia says will last for as long as it takes to carry out repairs, added to fears of winter gas shortages that could pull major economies into recession and lead to energy rationing. The latest development has seen the euro fall below 99 cents to the dollar for the first time in over two decades. Europe has accused Russia of weaponizing energy supplies in what Moscow has called an “economic war”. Nonetheless, Moscow blames Western sanctions and technical issues for supply disruptions. Ultimately, the European Commission has warned that a full cut-off of Russian gas supplies to Europe, if combined with a cold winter, could reduce GDP across the European Union by as much as 1.5% if countries did not prepare in advance.

USD
Concluding last week’s stretch of US economic data was the release of the monthly employment report: Non-Farm Payrolls. Friday’s employment report for August was a mixed bag – while the economy added more jobs than expected, wage growth moderated and the unemployment rate ticked higher. In fact, non-farm payrolls rose by 315,000 through the middle of the month, a slowdown from July’s 526,000 but clearly ahead of consensus forecasts for a 300,000 gain. Wage growth also eased by more than expected, with average hourly earnings rising only 0.3% rather than the 0.4% expected. As such, the annual rate of earnings growth stayed at 5.2%, well below the current rate of inflation. Ultimately, the mixed reading keeps alive the ongoing debate over the size of the next Fed hike. Nonetheless, expectations for aggressive Fed action have solidified since the hawkish speech by Powell at the Fed’s Jackson Hole conference last month.