Monfor Weekly Update

isk sentiment has turned more positive following the Fed minutes this week, which showed most officials leaning towards a slower pace of rate hikes and led to a relief rally in global equities and a generally weaker US dollar. Further lockdowns in China will remain a drag on global growth but have largely been overlooked by markets.

In the UK, economic data remains dire, but was slightly better than expected, and we fully expect the Bank of England to raise rates by a further 0.50% next month, with inflation expected to remain above 10% well into next year. Analysts forecast rates to peak around 4.50% mid-2023.

In the US, a rate hike of 0.50% is fully priced in for December, with markets forecasting a peak of 5% next year despite hopes that inflation has already peaked. The thanksgiving holidays have led to a general drop in liquidity as traders begin to focus on the end-of-year and risk mitigation.

The European Central Bank also looks set to raise rates by at least 0.50% in December as they remain fully focussed on stubbornly high inflation at the risk of a deeper recession.

Monfor Weekly Update

The Chancellor announced a range of spending cuts and tax rises in the budget as he aims to restore fiscal credibility and fill the £60 billion gap in public finances. His priority is bringing down stubbornly high inflation, which hit a 41-year high of 11.1%, and although most analysts think we are now close to the peak, it will likely remain above 10% well into next year.

The OBR’s independent assessment was bleak, with households seeing the biggest drop in disposable income on record, with the economy already in recession.

UK jobs data this week was mixed, with unemployment edging up to 3.6%, but wages rising by 6%, which, although higher than expected, further highlights the cost-of-living squeeze against surging price inflation.  

The Bank of England is expected to raise rates by a further 0.50% next month, taking rates to 3.50%, with markets forecasting a peak of 4.50% next year.

In the US, despite the good news that inflation is finally dropping, Fed officials continue to insist there is still a long way to go and they remain in tightening mode, with strong economic data again this week. Markets currently forecast US rates to increase by 0.50% in December, and peak towards 5% mid-2023, followed by potential rate cuts at the end of the year.

The European Central Bank also looks set to raise rates by a further 0.50% in December.

Monfor Weekly Update

The Bank is expected to raise rates by a further 0.50% next month which would take the Base rate to 3.50%, with markets forecasting a peak of 4.40% next year.

Focus now turns to the governments crucially important medium-term fiscal plans due November 17th, and how they plug the £60 billion gap in public finances. The OBR’s independent forecasts on the impact to the economy and government debt levels will be critical, with the chancellor trying to restore fiscal credibility following the fallout from September’s mini budget.

Some important data to focus on next week, including inflation, jobs, and retail sales.

In the US, inflation dropped by more than expected to 7.7%, reinforcing hopes that we are now past the peak and will continue to see a decline into next year, relieving pressure on consumers and in turn on the Fed. With a recession highly likely, the market expects the hiking cycle to slow in the coming months, with rate cuts potentially needed later next year.

Whilst in Europe, we expect the central bank to continue hiking aggressively as they remain focussed on stubbornly high inflation, despite the ongoing risks of slowing growth amid the hugely challenging economic outlook. The latest inflation data is due next week.

Monfor Weekly Update

The Bank of England raised interest rates by 0.75%, its biggest hike in over 30 years, taking Bank Rate to 3.00%. Further hikes are likely in the coming months, though the Bank stressed the peak would be lower than market expectations, as the economy moves into a recession that is expected to last through 2023. The Bank also began unwinding its QE program by selling gilts, becoming the first central bank to do so.

Market focus now turns to the government crucially important medium-term fiscal plans due on 17th November, and critically the independent Office for Budget Responsibility’s forecasts on how they would impact the economy and government debt levels.

UK housing market data this week showed the first signs of a slowdown with prices falling for the first time in 15 months, as higher interest rates and the increasing cost-of-living begins to hit the consumer.

The Fed also raised its benchmark rate by 0.75%, taking the upper bound target to 4.00%, with US rates expected to peak at 5.00% next year. The focus was on chair Powell’s comments, stating that although the pace of hikes may slow, the terminal rate could end up higher than previously thought.

In the EU, higher than expected inflation data this week, against the backdrop of slowing growth, further highlights the challenges facing the central bank following last week’s rate hike. European Central Bank members underlined the need for higher rates, even at the expense of driving the economy into recession.

Today, focus shifts to the US payrolls data due at 12.30pm, with further critical data due next week, including US inflation and UK growth numbers, that will only add to the current volatility.

Please note:  The news and information contained on this site should not be interpreted as advice or as a solicitation to offer to convert any currency or as a recommendation to trade.

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