September 27, 2022

“All eyes remain on the pound and whether the BoE will act promptly to stop the currency’s decline. The expectation on sterling heading to parity with the dollar looms closer. Also today, US consumer confidence data followed by comments from Fed Chair Powell will be closely watched.”

Sam Cornford, Partner – Head of Trading

Main Headlines

President Joe Biden’s long-awaited action on student loan relief will cost the federal government $400 bn in loan repayments to the US Treasury, the Congressional Budget Office declared yesterday. The sum, while a sizable investment, is on the lower end of estimates for the plan Mr Biden announced in August that, at the time, was projected to cost as much as $600 bn by some analysts. The Biden administration had faced calls for months to take definitive action one way or the other on the issue. Since the president took office in 2021, his administration had continued a pattern of extending loan repayment freezes that while providing temporary relief for borrowers did little to alleviate the stress that many felt as each deadline approached.

Halifax, a trading division of Bank of Scotland and a wholly owned subsidiary of Lloyds Banking Group, said yesterday it had temporarily withdrawn all its mortgage products that come with a fee from the market amid continuing volatility surrounding the pound. The move comes after chancellor Kwasi Kwarteng announced a raft of tax cuts last week, prompting concerns for the impact on inflation. The pound hit headlines again yesterday after plummeting to a record low against the dollar overnight, sending shockwaves across the economy. It regained ground later in the day, recovering to around 1.07 dollars when European markets closed, despite the Bank of England quashing speculation that it might announce an emergency interest rate hike to steady the pound.

GBP

Sterling is well bid against most major currencies overnight. The pound recoups losses over speculations of an emergency rate hike by the BoE. After breaking below March 2020’s lows near 1.1500 Sterling sank to an all-time low at $1.0350 as investors rushed to sell the currency and government bonds in a major vote of no confidence in new Prime Minister Liz Truss’s economic plans, which include large tax cuts funded by steep increases in government borrowing. Under Chancellor of the Exchequer Kwasi Kwarteng’s “mini budget” announced on Friday, the UK is proposing the biggest tax cuts in 50 years, including abolishing the 45 percent tax rate on incomes over 150,000 pounds ($162,000). BoE Governor Bailey released a statement noting that the central bank is monitoring financial markets very closely and may schedule an emergency meeting this week to hike Bank rate immediately.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. Central European policymakers are seeking to end a cycle of interest rate hikes running since last year even as inflationary pressures remain and the world’s major central banks keep pursuing higher rates. Central banks in Hungary, the Czech Republic and Poland begin a round of policy meetings today with rate setters in Budapest weighing what might be one final rate increase. The moves to end tightening cycles are not without risks. Markets are turning against riskier emerging market assets as the US Federal Reserve aggressively hikes rates – boosting the dollar – while wage growth in central Europe is running hot in most places.

USD

The dollar is weaker than most major currencies in the early morning trade. US dollar strength has been “devastating to the rest of the world and should come back to bite” the country’s competitiveness and economic activity, eventually “forcing the Fed to pivot” away from its restrictive monetary policy, Ark Investment Management CEO and Founder Cathie Wood said in a series of tweets yesterday. The yield curve “suggests” that US monetary policy has not been this restrictive since the ‘80s. As measured by the 2-year Treasury yield relative to the 10-year Treasury yield, it has inverted by 50 basis points, the 10-year yield at 3.75% compared to the two-year at 4.25%.

Markets

The S&P 500 notched a new closing low for 2022 and the Dow Jones Industrial Average slipped into a bear market as interest rates surged and turmoil rocked global currencies. The S&P 500 declined 1.03% to 3,655.04, falling below the June closing low of 3,666.77. At one point during the day, the index dipped to 3,644.76, less than eight points away from its intraday low of 2022: 3,636.87. The Dow dropped 329.60 points, or 1.11%, to 29,260.81, accelerating losses in the final moments of trading. Europe’s STOXX 600 index rose this morning, led by automakers and travel stocks following a three-day selloff triggered by global recession fears, while Italian payments group Nexi (BIT:NEXII) topped the benchmark index on a strong business outlook. The continent-wide index was up 1.2%.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Sweden Aug. PPI, trade balance
10:00 a.m.: Euro-area Aug. M3
10:00 a.m.: Netherlands to sell bonds
11:00 a.m.: Italy to sell bonds
11:00 a.m.: UK to sell linkers
11:30 a.m.: Germany to sell bonds
12:00 p.m.: Riksbank’s Ingves speaks
12:50 p.m.: ECB’s Centeno speaks
1:00 p.m.: BOE’s Pill speaks
1:00 p.m.: ECB’s Villeroy speaks
1:30 p.m.: ECB’s Panetta speaks
2:00 p.m.: Hungary rate decision
3:15 p.m.: ECB’s de Guindos speaks
Workers plan to strike at the UK’s Felixstowe port through Oct. 25

Corporate Events

Earnings include Ferguson, BlackBerry

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