Last week was volatile for sterling, setting a fresh record low against the US dollar and trading in the 8% range. The Bank of England intervened by temporarily buying long-dated paper to address market ‘dysfunction’, helping to lower gilt yields. The 30-year gilt yield, for instance, fell below 4%, having soared above 5%; to put this figure into perspective, the mid-price for Q2 was 2.25%. It was rumoured that intervention was required to rescue pension funds. It also resulted in the BoE delaying its planned start of active gilt sales (quantitative tightening).
An additional consequence of the mini-budget fallout has been the rise of Labour in the opinion polls. A poll published on Thursday by Survation gave the party a vote share of 49%, 21 points ahead of the Conservatives on 28%. A separate survey by YouGov put Labour even higher at 54%, 33 points ahead of the Tories.
The Conservative Party conference started on the weekend and closes on Wednesday. Already the government announced a U-turn on plans to scrap the 45p rate of income. Chancellor Kwasi Kwarteng confirmed the decision after a public outcry. “We just talked to people, we listened to people, I get it,” he explained. PM Liz Truss is due to deliver closing remarks on Wednesday; markets will watch her comments closely.
Broad US strength continues
Investors will continue to digest the reports of sharp output cuts by OPEC and its allies when they meet on October 5. Having continued to extend its broad-based move, the US dollar Index continued to move higher last week before it ended by losing some ground on Friday and breaking below 112.00. Elsewhere, various media outlets reported over the weekend that OPEC+ is considering slashing production by more than 1 million daily barrels. Still, the alliance delegates said a final decision on the size of the cuts will not be made until Wednesday this week.
Looking ahead, the ISM manufacturing and services reports for September will likely stay above the 50-growth threshold. The spotlight, however, will primarily be on the official September labour market data on Friday as the highlight economic release. Market analysts described last month’s labour report as mixed. Nonfarm payrolls growth slowed but remained robust at 315k; wage growth showed tentative signs of cooling and the unemployment rate unexpectedly rose to 3.7% from 3.5%, driven by higher labour participation. For September, consensus forecasts expect another robust month for job growth with a rise of 280k for nonfarm payrolls.
Meanwhile, the unemployment rate is forecasted lower to 3.6%. Average earnings growth will be closely reviewed after rising by 0.3% m/m last month, the lowest increase since April 2022. Ahead of the employment data, investors reviewed updated monthly releases for construction spending and the ISM manufacturing report on Wednesday.
Inflation continues to rise to record levels
The single currency remains fragile and susceptible to volatile movement in headlines flowing out of the Kremlin and Ukraine. In the meantime, inflation remains front and centre, with interest rates set to increase by record amounts. Inflation in the region hit a new high for the 11th consecutive month as energy prices continued to rise. Consumer prices in the eurozone rose 10 per cent in September, accelerating from 9.1 per cent in August, which was already the highest level in the region’s 23-year history. The next monetary policy meeting is on October 27.
Looking to the week ahead, ECB President Lagarde will speak at the event organised by the Central Bank of Cyprus. The market will watch for clues on policy. Regarding economic data, the main focus will be on the German factory orders and retail sales, which are due for release on Thursday.
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