Good morning,
It seems the BBC’s weather app thought the UK was in for a wild ride, with wind speeds clocking in at a staggering 15,759 mph. While the app warned of hurricane-force winds that could whisk you off your feet (and perhaps half the country with it), the BBC quickly reassured us that it was merely a technical hiccup. So, no need to batten down the hatches just yet—rest assured, calmer skies are ahead.
Last Week
The dollar’s rally, which saw a 5% gain by July, has softened following expectations for lower US interest rates, confirmed by a 0.5% Federal Reserve cut in September. However, recent robust US job creation suggests the dollar’s decline may not continue, as markets have already priced in a projected 1.5% rate cut by late 2025. Further cuts would require significant economic weakening, which seems less likely after the strong jobs data. EUR/USD, struggling near 1.1200 in August, has broken key support levels, signalling potential further downside. With US 10-year Treasury yields above 4%, and inflation data suggesting a gradual approach, the market now expects a more moderate 0.25% Fed rate cut in November.
The UK’s long-term borrowing costs have surged amid growing investor concerns over the Labour government’s upcoming Budget. With Rachel Reeves set to deliver her first Budget, bondholders are warning that any misstep in borrowing or investment plans could trigger a gilt sell-off. The spread between UK and German 10-year bond yields has widened to its highest in over a year, reflecting fears of increased UK debt and persistent inflation. Ben Nabarro, Chief UK Economist at Citi Bank, has cautioned that memories of the disastrous mini-budget of 2022 still loom large, and without clear fiscal responsibility, investor confidence in the government could falter once again.
China’s growth is expected to fall short of its 5% target this year, according to World Bank forecasts, raising concerns about the country’s economic outlook. Despite recent government stimulus efforts, weak consumer and business sentiment has cast doubt over Beijing’s ability to meet its growth goals. Chinese stocks experienced their largest one-day decline since the pandemic, with the CSI 300 dropping 7.1%. The sharp fall followed a disappointing press conference from Chinese policymakers, who failed to unveil additional stimulus measures, dampening investor hopes. The setback has intensified fears that China’s efforts to revive its economy may prove inadequate.
This Week
Following the Reserve Bank of New Zealand’s rate cut, attention now shifts to the ECB. Investors are almost fully pricing in a 25-basis-point rate cut at Thursday’s meeting, following weaker-than-expected economic data and inflation dipping below 2%. However, with no new macroeconomic projections this month, all eyes will be on President Lagarde’s press conference for further hints about December. Although another cut seems likely, divisions within the ECB remain. If the hawks win and rates stay on hold, markets could be caught off guard, pushing the euro higher as traders reassess their outlook.
The pound has been treading water after last week’s decline, triggered by BoE Governor Bailey’s hints of potential rate cuts if inflation data continues to cool. With the UK CPI figures due on Wednesday, traders are watching closely for clues on the BoE’s next move. Current market pricing suggests a 75% chance of a 25-basis-point cut in November, with another possible in December. With private sector price pressures hitting a 42-month low, further declines in inflation could bolster rate cut expectations, putting additional pressure on the pound. Upcoming employment and retail data will also be key in shaping the market’s outlook.
Key events
Tuesday 15th October
17:00 UK Claimant Count Change
23:30 Canadian CPI
Wednesday 16th October
08:45 New Zealand CPI
17:00 UK CPI
Thursday 17th October
11:30 Australian Unemployment Rate
23:15 Euro Refinancing Rate
23:30 US Retail Sales & Unemployment Rate
23:45 ECB Press Conference
Friday 18th October
17:00 UK Retail Sales
Have a great week,
The Garton Team.