November 3, 2022

“The dollar rallied across the board after yesterday’s announcement by the Fed to raise interest rate by another 75bps, which brings federal funds rate to between 3.75 per cent and 4 per cent. The maintenance of the hawkish rhetoric by Jerome Powell, dashing hopes of any Fed pivot further supported the USD. All eyes are on the BoE interest rate decision today, which is expected to be a 75bps rate hike to bring the bank rate to 3 per cent.”

Sam Cornford, Partner – Head of Trading

Main Headlines

President Joe Biden yesterday delivered a stark warning to Americans that the future of the nation’s democracy could rest on next week’s midterm elections, an urgent appeal coming six days before final ballots are cast in a contest the president framed in nearly existential terms. “We can’t take democracy for granted any longer,” the president said from Union Station in Washington, blocks from the US Capitol where a mob attempted to interrupt the certification of the 2020 election. It was a sharp message to Americans considering sitting out next week’s congressional elections that the very future of the country was at stake. Biden suggested the preponderance of candidates for office at every level of government who have denied the results of the last presidential contest was red-flashing warning signal for the country.

Rishi Sunak is to conduct a review of the pledges he made in both his Conservative Party leadership campaigns to check if they are “deliverable”. The promises included long-term cuts to taxation and setting up a vaccines-style taskforce to tackle NHS delays, among other things. But yesterday the prime minister’s press secretary said the pledges would have to be reassessed and discussed with ministers, with no guarantee that any would go ahead. She said the review reflected the way the economic situation had changed since September when Sunak lost to Liz Truss in the race to succeed Boris Johnson. “We are looking at all the campaign pledges and we are looking at whether it is the right time to take them forward,” she said.

 

GBP

Sterling is weaker than most major currencies in the early morning trade. The Bank of England looks on track to raise interest rates by three quarters of a percentage point to 3% later today, its biggest rate rise since 1989 as it battles the highest inflation in 40 years. The BoE has faced political and financial market turmoil since its last rate rise on Sept. 22, a day before former Prime Minister Liz Truss’s government launched an unfunded 45 billion-pound ($52 billion) package of tax cuts. Markets are now more stable, with British government borrowing costs broadly back to where they were before the upheaval. On Tuesday, the BoE was able to begin selling bonds from its 838 billion-pound quantitative easing stockpile.

 

EUR

Euro is stronger against sterling and weaker against the dollar this morning. European Central Bank President Christine Lagarde warned that a “mild recession” is possible but that it wouldn’t be sufficient in itself to stem soaring prices. Speaking a week after the ECB’s second straight 75 basis-point hike in borrowing costs, and as fears mount that the energy crisis will drag down output in the 19-nation euro zone, Lagarde said “we don’t believe that that recession will be able to tame inflation.” While a contraction isn’t her “baseline” scenario, Lagarde’s Latvian colleague, Martins Kazaks, said this morning he expects one in the coming months. Executive Board member Fabio Panetta, meanwhile, warned about the economic risks of rapid rate rises.

 

USD

The dollar is well bid against most major currencies overnight. The Federal Reserve stepped up its fight against a 40-year high in US inflation yesterday, announcing its fourth consecutive three-quarters of a percentage point hike in interest rates but signalling the pace of increases may soon slow. The Fed chair, Jerome Powell, said there were “no grounds for complacency” but acknowledged that officials were considering the pace of rate rises as they assess their impact on the wider economy. “Even so, we still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he said. Powell said the chances of the US economy achieving a “soft landing” and avoiding recession as it fights off inflation had “narrowed”.

 

Markets

European stocks pulled back this morning as global markets react to yet another rate hike from the US Federal Reserve. The pan-European Stoxx 600 dropped 1.3% in early trade, with tech stocks shedding 2.5% to lead losses as most sectors and major bourses slid into the red. Global markets have reacted negatively to the Fed’s latest move; shares in the Asia-Pacific dropped this morning while US stock futures were flat in early premarket trade following losses during the daily trading session. The S&P 500 suffered its worst rout on a Fed decision day since January 2021. The S&P 500 fell 2%, the Dow Jones Industrial Average fell 1.2% or 389 points, the Nasdaq was down 2.83%.

 

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Turkey Oct. CPI
8:30 a.m.: Switzerland Oct. CPI
8:50 a.m.: ECB’s Kazaks speaks
9:00 a.m.: ECB’s Panetta, Nagel, de Cos speak
9:05 a.m.: ECB’s Lagarde speaks
10:00 a.m.: Norges Bank rate decision
10:30 a.m.: UK Oct. composite PMI
10:50 a.m.: ECB’s Elderson, Villeroy speak
11:00 a.m.: Euro-Area Sept. unemployment
1:00 p.m.: BOE rate decision
1:30 p.m.: BOE’s Bailey gives press conference
1:30 p.m.: US Sept. trade balance, weekly jobless claims
2:30 p.m.: Czech central bank rate decision
3:00 p.m.: US Sept. factory orders, durable goods orders
4:05 p.m.: ECB’s Centeno speaks

 

Corporate Events

Earnings include BNP Paribas, BMW, ConocoPhillips, Enel, ING, Amgen, Starbucks, Cigna, PayPal, Warner Bros. Discovery, BT, EOG, Moderna, Regeneron, Zoetis, Marriott, Expedia, Kellogg, Datadog, DoorDash, Coinbase
Barclays Asia Forum in Singapore

 

 

To learn more about Ballinger & Co., please visit our website or our LinkedIn page.