FX Daily: So much volatility between hope and fear
Dow, S&P 500, and Nasdaq Composite surged 2.8%, 2.6% and 2.2% respectively. Reuters cited market participants closing out defensive put options positions placed before the higher-than-expected US CPI released yesterday. The US Treasury 2Y yield firmed 17.2 bps to 4.464% on the stronger-than-expected US CPI report, holding the session’s high of 4.529%. The market fully bought into the Fed’s projections for rates to end 2022 around 4.50%. They also believed in the Fed’s willingness to risk a recession to control inflation. The 10Y yield rose less by 4.7 bps to 3.943%, down from the session’s high of 4.075%. US CPI inflation fell slower-than-expected to 8.2% YoY in September; consensus had expected a drop to 8.1% from 8.3% in August. Conversely, core inflation rose from 6.3% to 6.6%, a new high for the year.
We are wary of volatility even as GBP appreciated 2% to 1.1326, near its high a week ago. The 10Y Gilt yield eased a third day by 23.7 bps to 4.198%, its lowest level in a week. The Bank of England stepped up gilt purchases to counter another sell-off, leading market participants to cover their shorts. Rumours also floated that Chancellor Kwasi Kwarteng would U-turn on the plan to freeze the corporate tax rate. He has brought forward the publication of his fiscal plan and the OBR forecasts to 31 October from 23 November. Pension funds want the BOE to extend its emergency bond purchases to 31 October. However, BOE Governor Andrew Bailey told them the emergency support would end as scheduled on 14 October. Bailey will be speaking and participating as a panelist at a G30 event tomorrow. Kwarteng said BOE would be to blame for any fresh market turmoil. The IMF urged the Truss government not to prolong the pain on the mini budget which it criticized for working against the BOE’s priority to control inflation. Many still expect the BOE to deliver a 100 bps hike at its next meeting on 3 November. Given the fluid situation, ratings agencies remained negative on the outlook for UK debt.
Quote of the day
“The target for every great champion is to play for the team.”
14 October in history
First live telecast from a manned US spacecraft Apollo 7 in 1968.
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