The pound is recovering as the Chancellor’s budget brings back economic credibility and after UK retail sales unexpectedly rose in October. Still, with taxes and interest rates rising and double-digit inflation, the outlook is bleak.
· Fed official James Bullard sees Fed peak interest rates at 5%-7%
· US existing home sales data could highlight the slowdown in the sector
· USD/JPY falls after Japan inflation hits a 40-year high
The market’s reaction to yesterday’s UK budget was tame compared to the reaction following Kwasi Kwarteng’s experience just months earlier. The FTSE closed only a few points lower, and the gilt market held up, most likely as many of the measures were pre-released.
The biggest move was seen in the pound, which briefly dropped 1%, which came after the Office of Budget Responsibility (OBR) downwardly revised the UK GDP forecast for 2023 to -1.4%, down from the 1.8% growth forecast in March. Growth for 2024 was also revised lower.
However, the pound has bounced back off yesterday’s low of 1.1760 and is attempting to push over 1.19 as investors focus on the positives from the budget. Economic credibility is being restored after the chaos of Liz Truss’s rule.
Wall Street closed in the red as recession fears returned to haunt the market. St Louis Federal Reserve President James Bullard unnerved investors by saying that the peak Fed fund rate needs to be between 5%-7% to sufficiently slow economic activity to lower inflation to the target 2% level. His comments come even as inflation is showing signs of cooling and some other Fed officials are hinting towards a slower pace of rate hikes.
Stocks on Wall Street closed off the session lows thanks to a late-in-the-day rally, helping European bourses head for a positive open. The DAX is set to open 0.4% higher, the CAC points to gains of 0.9% on the open, and the FTSE is up 0.2%.
UK retail sales unexpectedly rose 0.6% MoM in October after falling 1.5% in September. The rise in sales is likely a modest rebound following the decline after the bank holiday for the Queens’ funeral rather than the start of a new trend.
With inflation at 11.1%, interest rates rising, and taxes also set to increase, the UK consumer could remain under pressure for the foreseeable future. Retail sales are unlikely to recover meaningfully until the squeeze on household incomes eases.
US housing data
The US economic calendar is relatively quiet. The focus will be on US housing sector data. While recent macroeconomic data has shown that the US economy is resilient amid high inflation and rising interest rates, there are cracks in the housing sector. Home starts fell 8.1% in October, and existing home sales data, due today, is also expected to fall as higher interest rates cool demand. This could well be a case of bad news is good news and helps stocks higher.
USD/JPY is underperforming its major peers after Japanese inflation rises to a 40-year high. The weak yen has lifted imported inflation, boosting CPI to 3.7% and core CPI, which strips out food and fuel, to 3.6%, ahead of the 3.5% and the highest rate since 1982.
The hot inflation print raises questions over the BoJ’s credibility as it sticks to its ultra-loose monetary policy stance, expecting inflation to fall back to 2% next year.
USD/JPY trades at 139.80 at the time of writing.
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Sources: Bloomberg, CNBC, Reuters
Original article provided by Trading Writers