Gilts rally as UK fiscal U-turn expected

14 October 2022

Chris Scicluna
, 
Emily Nicol

Gilts rally at market opening as UK fiscal U-turn now widely expected
Gilts have rallied at market opening (with the 10Y yield down more than 20bps again), and GBP is still firmer, above $1.13, ahead of this afternoon’s final BoE purchases of long-dated and index-linked gilts. With Chancellor Kwarteng having returned early after taking an ear-bashing at the IMF annual meetings, he is widely expected to prepare a U-turn on his reckless tax-cutting plans, forced by markets and backbench Tory MPs alike. His earlier decision to reverse plans to hike corporation tax, which would cost more than £12bn next fiscal year and more than £18bn per year over the medium term, is likely to be top of the list of measures to be ditched.

Yen still above 147/$ as Japanese authorities continue to threaten intervention
Having yesterday appreciated to a 32-year high following the release of stronger-than-expected US CPI data, the yen remains above 147/$ as Japanese Finance Minister Suzuki continues to express discomfort (e.g. “We can’t tolerate excessive moves triggered by speculation”, and “we’ll take appropriate responses against excessive moves”) but fails to confirm any further intervention, three weeks on from the authorities’ previous efforts to arrest depreciation. ¥150 now within reach.

Chinese inflation surprises on the downside suggesting some room for PBoC manoeuvre
Chinese CPI inflation picked up in September, rising 0.3ppt to 2.8%Y/Y, the highest since April 2020 but 0.1ppt less than the consensus on the Bloomberg survey. The cause of the rise was food, for which prices accelerated 2.7ppts to 8.8%Y/Y not least due to a surge in pork (up more than 13ppts to 36%Y/Y) as well as vegetable prices. But, while core goods inflation rose 0.6ppt to 4.3%Y/Y, services inflation slowed 0.2ppt to just 0.5%Y/Y, seemingly still weighed by pandemic containment efforts. And excluding both food and energy, core CPI inflation slowed 0.2ppt to just 0.6%Y/Y, the sixth successive sub-1% reading and an 18-man low. Meanwhile, producer price inflation slowed markedly, by 1.4ppts to just 0.9%Y/Y, again 0.1ppt below the consensus forecast, not least reflecting ongoing pressures in commodity markets. That suggests some room for PBoC manoeuvre to support the economy – but mindful of a range of concerns, including the CNY, our colleagues in Daiwa Hong Kong expect only one more cut in the RRR of 50bps in Q4 and no changes to interest rates.

Final French inflation data align with flash estimates; euro area trade deficit set to widen further to new series high on energy prices
As with the equivalent German data yesterday, which confirmed a rise in the national CPI measure rise to 10.0%Y/Y, final French inflation figures released this morning aligned with the flash estimates. So, the national CPI rate fell 0.3ppt to 5.6%Y/Y, with the EU-harmonised HICP rate down 0.4ppt to 6.2%Y/Y. The drop in part reflected lower energy inflation linked to an increase in policy-related fuel discounts. But there was also a sizeable easing in services inflation (down 0.7ppt to 3.2%Y/Y), amid a sharp slowdown in airfares, package holidays and accommodation costs. As such, despite a slight acceleration in non-energy industrial goods inflation, the national measure of core inflation eased slightly by 0.2ppt to 4.5%Y/Y. Looking ahead, euro area goods trade data for August are also due this morning. With the German trade surplus having narrowed to its smallest since 1992, we are likely to see a widening in the euro area’s deficit from July’s record high (€40.3bn) due not least to elevated prices of imported energy.

Retail sales and consumer sentiment the focus in the US
The main focus in the US today will be retail sales figures for September. While spending on new autos will provide a boost, lower gasoline prices could weigh on spending at services stations. And sales of non-essential items seem likely to be limited by weak consumer confidence and higher prices. Overall, our colleagues in Daiwa America forecast sales growth of 0.4%M/M (and just 0.2%M/M ex-autos. While lower gasoline prices could give some support to confidence, the University of Michigan consumer sentiment survey will likely suggest a weak spending outlook at the start of Q4 too, with the headline sentiment index expected to remain close to historically low levels. But focus on this survey will also be on the measures of households’ inflation expectations, with the Bloomberg survey consensus forecasting a modest uptick in the longer-term (5-10yr ahead) index.

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