UK government backtracks

Market movers today

No key data releases out today.

Three Fed speakers, Williams, Mesters and Daly, are on the wires ahead of a batch of US job market data this week. We continue to expect two more 75bp hikes in the November and December meetings, which would end the hiking cycle at 4.50-4.75% by year-end.

Following the RBA this morning, the RBNZ rate decision is due overnight. We expect another 50bp hike to 3.50% in line with consensus.

The 60 second overview

Our new Nordic outlook is out! This morning, we have published our Nordic Outlook with updated forecasts for the Nordic economies. We now expect recessions across the Nordic countries, as lower spending power and tighter financial conditions take their toll on the economies, leading to higher unemployment and lower house prices. We are especially concerned about Sweden, where consumers are facing a lot of headwind. On the other hand, the Nordics have a strong starting point compared to many other countries in Europe, and even though it increases, unemployment should still be relatively low. For more details, see Nordic Outlook - Hoping for a mild winter, 4 October.

Global manufacturing activity at the weakest level since the global financial crisis (excluding the first COVID-19 lockdown): Yesterday, the global PMI manufacturing index compiled by JP Morgan showed further setback for the sector, taking new orders to the lowest levels since the global financial crisis in 2008 and its immediate aftermath. On a positive note, yesterday's release indicated that bottleneck pressures continue to fade and businesses continue to hire and invest in new equipment.

UK government backtracks on its fiscal plans: Yesterday, Conservative Prime Minister Liz Truss backtracked on cutting taxes for the country's highest earners. This comes after significant opposition from influential and senior Conservative MPs (not least Michael Gove) at this week's Conservative Party Conference, which kicked off on Sunday. Additionally, Chancellor Kwarteng is now set to bring forward the medium-term fiscal plan already this month alongside an independent OBR report (previously set for 23 November). While the scrapping of the tax cut to highest earners is a small part of the growth plan (GBP 2bn out of a total GBP 45bn) it highlights the pressure the Government is under both from external forces, but increasingly from fellow party members. While the tax cutting agenda has faced scrutiny, there continues to be broad support for capping household energy bills and providing near-term support for businesses.

The Reserve Bank of Australia surprises dovish by hiking rates by only 25bp this morning. Consensus was looking for another 50bp hike, while market was split between 25 and 50. While Australian inflation remains clearly above target and labour market conditions are still historically tight, RBA emphasized the weakening global growth outlook as a key reason to slow the pace of hikes back to 25bp. Market's longer-term inflation expectations have moderated, and RBA sees that the recent tightening in financial conditions will continue to constrain economic activity with a lag. AUD/USD moved sharply lower following the decision, and we see risks tilted towards further weakening on a 12M horizon.

FI: The U-turn on the tax reliefs by the UK government sent global rates significantly lower in a gradual move through the day, where e.g. German Bunds ended around 20bp lower on the day. There was little news flow on the day as a whole. Peripheral spreads tightened, led by Italy, 7bp to core. The BoE's intervention last week has so far turned around the sentiment and relieved part of the stress in markets, despite that they have bought only GBP 3.7bn in total (and GBP 22m yesterday).

FX: NOK FX spot has seen huge swings and was yesterday's big winner amid risk appetite rebounding and commodities moving higher. It is not unusual to see NOK highly sensitive to positive news following a sell-off like the one over the last week. GBP was also one of yesterday's big winners with risk appetite rebounding and PM Liz Truss backtracking on tax cuts for highest earners. This comes after significant opposition at this week's Conservative Party Conference, which kicked off Sunday. Additionally, Chancellor Kwarteng is now set to bring forward debt-cutting plan this month.

Credit: After a weak start to the day, credit markets turned around, with iTraxx Xover tightening 16bp and Main 2bp. Credit Suisse attracted a lot of attention and spreads on its outstanding 5y CDS contract widened more than 50bp to close above the highs from 2009.