Nasdaq hits 2-year low before FOMC minutes. UK GDP contracts – Daily Market Brief, October 12, 2022

The Nasdaq hit a 2-year low on Tuesday amid an ongoing risk-off tone on Wall Street. The FTSE is set to open flat after UK GDP unexpectedly fell to -0.3% MoM in August, raising the likelihood that the UK economy will fall into recession.  

·         BoE Governor sends GBP sharply lower on 3-day deadline warning for support, before backtracking

·         USD/JPY rises to a fresh 24-year high over 146 after hawkish Fed comments

·         FOMC minutes are expected to reinforce the Federal Reserve’s hawkish stance

Recession fears and a warning from the IMF over the global economic outlook sent European stocks lower for a fifth straight session yesterday.

Stocks on Wall Street initially followed suit, with the Nasdaq dropping to a new 2-year low and closing at 10,400. Meanwhile, the Dow managed to eke out a positive close in a volatile session.

UK GDP

The UK economy unexpectedly shrank in August, raising the possibility that the country is in a recession. UK GDP dropped -0.3% MoM in August, down from a 0.2% rise in July. Expectations had been for no growth across the month.

The downturn indicates that it will be difficult for the UK to avoid a contraction in Q3, which is expected to continue into at least the first quarter of next year.

The FTSE is set to open the day flat, and GBP/USD is seen edging up to 1.10.

BoE

The data comes as the BoE continues to create confusion in the market. Yesterday the central bank stepped in again to shore up the bond market, widening the scope of its bond-buying programme to prevent a fire sale in bonds. The move helped to steady the market mood, yields eased, and the pound rose.

However, BoE Governor Andrew Bailey went on to spook the markets by insisting that the programme would continue for just three more days. A move that came as pension funds scrambled to shore up their positions before Friday’s hard deadline. GBP/USD dropped back below 1.10 on the comments, having risen as high as 1.1180 earlier in the session.

Today we are seeing a slight rebound in the pound on reports that the BoE could be more flexible if market volatility flares up again. The central bank signalled privately that it could prolong the bond market support programme, which started following the turmoil caused by the Chancellor’s mini-budget.

USD/JPY

USD/JPY has risen to a fresh 24-year high, above 146, the level that previously triggered Japan’s intervention. The USD strengthened following more hawkish commentary from Federal Reserve speakers yesterday.

Cleveland Fed President Loretta Mester said that a more restrictive policy was needed to tame inflation and that the central bank has yet to make a dent in inflation. Her comments come ahead of CPI data due tomorrow, which is broadly expected to show that core CPI continued to rise in September.

Looking ahead

Today sees the release of US PPI inflation, which is expected to ease mildly to 8.4% YoY in September, down from 8.6% in August.

The minutes of the September FOMC will also be under the spotlight and are expected to reinforce the Fed’s hawkish message. Fed Chair Powell has been clear in his message that the Fed is committed to lowering inflation and that the journey could be painful. There is no reason to assume that the minutes will be anything other than a commitment to this stance. 

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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