UK political instability continues to drive sentiment following the resignation of prime minister Truss, although UK assets had little reaction with markets hoping the new leader can restore some stability.

The medium-term fiscal plans will still be announced on October 31st as the government attempts to re-establish its fiscal credibility, likely to be at the expense of a deeper and more prolonged recession. The Office for Budget Responsibility’s independent assessment will be critical.

UK inflation has again risen above 10%, driven by soaring food prices, and retail sales figures this morning were extremely poor, further highlighting the squeeze on the consumer and ramping up pressure on the Bank of England ahead of the November 3rd meeting. The market is split on whether we get a 0.75% or a 1% hike, and the expected peak is now 5.10% by mid-2023 with long-term yields having dropped considerably over the past week. The Bank will also begin selling its stock of government bonds next month as it begins unwinding its QE program.

Markets have calmed somewhat following the reversal of most of the mini-budget but remain on high alert with politics continuing to drive short-term momentum. 

In the US, we fully expect another 0.75% hike in November as the Fed continue their aggressive path of policy tightening, whilst the European Central Bank is also forecast to raise rates by a further 0.75% next week as they continue to fight surging inflation.