Morning Report

September 22, 2023

“The Bank of England narrowly voted in favour of a rate pause yesterday afternoon as confidence grows in the disinflation process, sending the Pound sliding. Markets have no time to settle following the string of central bank decisions this week, however, as the macroeconomic diary brings PMI survey readings from the Europe, UK, and US today.”

Tim Hallinan – Trading Director


Main Headlines

A federal judge in Texas has rejected the attempt by 25 states to block a Biden administration rule that allows employee retirement plans to consider environmental, social, and governance (ESG) factors in their investment decisions. The rule became effective on January 30. Furthermore, the judge granted the Biden administration’s request to dismiss the lawsuit filed by the Republican-led states, which argued that the rule would endanger the retirement savings of millions of Americans.

British Chancellor Jeremy Hunt revealed on Thursday that higher long-term interest rates are exerting pressure on the budget, making it “virtually impossible” to include tax cuts in his upcoming budget update scheduled for November 22. Hunt explained that the main reason for the pressure on our public finances is the increasing debt interest costs caused by long-term interest rate projections. On a contrasting note, British consumers have shown their highest level of optimism since the beginning of 2022, thanks to declining inflation and growing wages. The GfK consumer sentiment indicator rose for the second consecutive month to -21 in September, marking the highest level since January of the previous year, up from -25 in August.


Sterling is hovering above fresh lows achieved yesterday, as the Bank of England narrowly voted to hold the Bank Rate at 5.25%. In the release, CPI inflation was forecast to fall significantly in the short term, despite renewed pressure from oil prices, and monetary policy was said to be translating into a loosening labour market and slowing economic momentum. The split decision is indicative of two opposing pressures: the risks that inflation may embed more deeply if policymakers hold back, and the potential that economic output losses caused by overtightening would trigger a sharp reversal in monetary tightening. Unlike many central banks this week, the second risk was more openly acknowledged. The markets have priced in a 50% chance of a further hike in November, although a swing in the inflation data would likely be required to trigger this. Today, UK PMIs are set to remain stable, with the stagnating economic outlook unchanged.


The Euro is broadly steady this morning in response to a mixed bag of PMI data. The French figures disappointed on expectations to plunge deep into contraction, initially sending the Euro sliding. The common currency rebounded, however, as the German services PMI surged to 49.8 versus an expected 47.2, and the final Eurozone figure showed a positive gain at 48.4 against a 47.7 forecast. The PMIs have hit the Euro hard over the summer, and growth outlooks between the US and Europe have diverged dramatically. As the ECB’s Euro-supportive tightening fades away, growth is likely to come even more into focus – the mildly positive data today will come as a relief for the Euro, as continued disappointment in the output surveys could push it into freefall, and possibly towards last year’s below-parity lows if it sparks earlier-than-expected rate cuts.


The US Dollar retains its bullish trajectory this morning as US interest rates grind higher across the curve. Its expanding real yield advantage continues to propel the currency, after the Fed’s stiffened hawkish stance revised rate expectations significantly higher over the next few years. Jobless claims figures further contributed to the US economic resilience narrative yesterday, printing a positive surprise at 201,000 against the forecasted figure 224,000, down from 221,000 in the previous week. USD/JPY also neared yesterday’s year-to-date high today as the Bank of Japan stuck to the dovish script, with no change to its ultra-loose stimulus and falling confidence that policy may be tightened any time soon. The US PMIs this afternoon are due to show a services sector that continues to remain in expansionary territory at 50.7, and an improving manufacturing sector that edges closer to the 50 mark at 48.2.


World stocks and risk assets experienced a second consecutive day of decline on Thursday, accompanied by a surge in US bond yields to multi-year highs. These moves followed the Federal Reserve’s updated rate outlook, which reinforced its “higher for longer” stance on interest rates. MSCI’s World Index saw a significant drop of 1.5%, marking its most substantial decline in six weeks, and it also endured its worst five-day performance since March. The MSCI Asia ex-Japan index remained relatively flat after Thursday, which turned out to be its most challenging day since early August, and Wall Street slumped to its lowest point in three months.

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

8:00 a.m.: UK Aug. Retail Sales
9:00 a.m.: Spain 2Q GDP
9:15 a.m.: France Sept. HCOB PMIs
9:30 a.m.: Germany Sept. HCOB PMIs
10:00 a.m.: Euro-area Sept. HCOB PMIs
10:30 a.m.: UK Sept. S&P Global/CIPS PMIs
12:00 p.m.: UK Sept. CBI Trends Total Orders
1:00 p.m.: ECB’s Guindos speaks
3:45 p.m.: US Sept. S&P Global PMIs
Riksbank’s Thedeen speaks
Ukraine 2Q GDP

Corporate Events

Earnings include Medacta, Ascential
China’s Bund Summit, through Sept. 24


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