GBP appreciated 1.5% to 1.0889 on a 49 bps fall to 4.01% in the 10Y Gilt yield. The Bank of England intervened to stabilize the Gilt market with a pledge to buy bonds with maturities of 20 years or more, up to GBP5bn at each auction, until 14 October. The BOE wants to avoid making interest rate decisions before its next monetary policy committee meeting on 3 November for fear of diluting its commitment to fighting inflation. Markets will look for more clarity from the three BOE speakers today – Deputy Governor Dave Ramsden, Chief Economist Huw Pill, and Member Silvana Tenreyro. GBP is not out of the woods.The BOE is seen addressing the symptom and not the cause. The Truss government has yet to address the credibility of the tax cut plans, which critics see adding to the inflation woes and raising questions about fiscal sustainability. Expect Chancellor Kwasi Kwarteng to stand his ground during his keynote address at the Conservative party conference on 3 October.
The BOE’s intervention triggered a relief rally.Dow, S&P 500 and Nasdaq Composite rallied 1.9%, 2.0% and 2.1% respectively. The US Treasury 10Y yield eased 21.4 bps to 3.731%. With the USD heavily overbought, markets covered their currency shorts. NZD, CHF, EUR, and GBP appreciated by 1.5-1.6%. USD/CNY plunged to 7.20 from the session’s peak of 7.25. The offshore USD/CNH rate plunged to 7.1624 from a peak of 7.2674. According to a Reuters exclusive, the People’s Bank of China told banks to reinstate the counter-cyclical factor in their daily fixings. The news also lowered expectations for China to ease monetary policy to support growth. It also did not imply that USD/CNY will be immune to rising US rates.
Atlanta Fed President Raphael Bostic supports a fourth 75 bps hike to 4% at the FOMC meeting on 2 November. Chicago Fed President Charles Evans wants Fed Funds Rate to peak and pause at 4.5-4.75% by December 2022 or March 2023. Evans believes real rates need to be at 2% for monetary policy to be restrictive enough to keep inflation on a downward trajectory. On Friday, consensus expects the US PCE deflator to ease to 6% YoY in August from 6.3% in July but sees the PCE core inflation rising to 4.7% from 4.6%, in line with CPI inflation. With US real rates still negative, it is difficult for markets to turn against the USD without a viable alternative currency.
Quote of the day
“He who rides a tiger is afraid to dismount.”
Chinese Proverb
29 September in history
Dow collapsed 7% on the bankruptcies of Lehman Brothers and Washington Mutual in 2008.
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