It was a busy day for central banks yesterday with multiple rate hikes across the board from the Norges Bank, Swiss National Bank and the Bank of England following on from another hawkish decision from the Federal Reserve on Wednesday night.

The declines in equity markets yesterday were primarily driven by a Federal Reserve that appeared to double down on its determination to crack down on inflation and hang the consequences when it comes to the US economy. The problem with that approach is it also has the unwanted side effect of forcing other central banks overseas to try and keep pace in order to mitigate the inflationary shock generated by a surging US dollar on their own currencies.

Consequently, US markets finished the day sharply lower, with the Nasdaq 100 and S&P500 closing at their lowest levels since July, pulling equity markets into similar weak finishes, with the DAX also closing at 2-month lows.

Today’s European open looks set to be a positive one as we come to the end of what looks set to be another negative week for markets in Europe.  

Yesterday’s decision to hike rates by 50bps by the Bank of England wasn’t too much of a surprise in the wider scheme of things. The Monetary Policy Committee (MPC) has always tended to lean towards conservatism when it comes to raising interest rates, preferring a cautious approach to the activism of the Federal Reserve, who generally tend to be more aggressive, when it comes to their policy responses.

What was surprising was the split about the best course of action when it comes to monetary policy with one vote for 25bps, three for 75bps and five for 50bps. The bigger question is what this tells us about how the MPC sees the UK economy against a backdrop of a stalling economy and inflation that has been exacerbated by a pound that has fallen over 16% over the past 12 months, and an inflation shock that has been global in nature.

While there is truth in the argument that the Bank of England can’t do much about surging energy prices, as well as supply chain issues, they can do something about the fact that core prices, which strips a lot of this noise out, is at a whopping 6.3%.

The Bank of England also has to contend with the fact that the UK government’s announcement to cap energy prices for consumers and businesses will take a a few percentage points off headline inflation heading into winter.

This may well have influenced their decision to be more cautious about hiking aggressively, but in a sense the new fiscal measures announced by the government could also have the effect of boosting demand and making it more difficult in bringing headline inflation lower. In any event the decision to start reducing the size of its sheet will also serve to act as a potential brake on inflation as well.

Later today we’ll get the full details of the mini budget from Chancellor of the Exchequer Kwasi Karteng where at the very least we’ll see the national insurance rise that was so heavily criticised in April reversed, from November, while the corporation tax rise that was due to take effect next year will be cancelled.

Other trial balloons this week have been cuts to stamp duty and the removal of the cap on bankers’ bonuses, which suggest a focus in areas that probably aren’t a high priority at this moment in time.  Rather than focussing on stamp duty, it would be more helpful in the move towards renewables to encourage or mandate the installation of solar panels on all new house building projects, as one example, in order to help reduce carbon footprints, and improve the energy efficiency of the housing stock.

What would be more helpful would be an overhaul of the business rates system, as well as simplifying the way online businesses pay tax, relative to their bricks and mortar peers. While this hasn’t been leaked it doesn’t mean that the Chancellor might not be forthcoming when it comes to what he has up his sleeve later today.  

For the moment bond investors are holding fire on what the new government’s new fiscal measures might mean for the UK economy, despite the surge in bond yields yesterday.

Yesterday’s move in yields was not confined to the UK, but across the board with US and European yields also surging, with UK 2-year gilt yields back at levels last seen in 2008, while US yields are even higher, at 15-year highs, pre-financial crisis.  

Also, it’s worth keeping an eye on the latest flash PMIs for September which are not expected to paint a particularly positive picture of economic activity.

France, Germany and UK manufacturing and services PMI numbers are forecast to show further deterioration, and a slide into contraction territory on all measures as higher energy prices take a further bite out of economic activity.

CBI retail sales for September are also expected to slow, as they give an early snapshot of how the UK consumer is faring, although there was a huge divergence between the CBI measure of retail sales in August, which were quite strong, and the official ONS numbers which showed a huge decline.           

EUR/USD – Marginal new low at the 0.9807 area and remains on course for the 0.9620 area. Trend line resistance from the highs this year remains the key in the current downtrend. A break above 1.0200 is needed to signal further gains.

GBP/USD – Slid down to the 1.1210 area with the 1.1000 area the main support area. We need to move back above 1.1370 to target 1.1500. 

EUR/GBP – Currently have support at the 0.8670 area, a break of which targets 0.8620. Resistance remains at 0.8800.  

USD/JPY – Eextended up to 145.90, before being knocked down by intervention to the 140.35 area. The 140.00 area now becomes key support, with a break below 140.00 signalling a potential move towards 138.20. Upside remains intact while above 140.00.

FTSE 100 is expected to open unchanged at 7,159.

DAX is expected to open unchanged at 12,531.

CAC40 is expected to open 3 points higher at 5,921.

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