The pound weakened and UK stocks rallied after British inflation slowed unexpectedly, catching traders off guard as they prepare for the Federal Reserve’s policy decision later.
(Bloomberg) — The pound weakened and UK stocks rallied after British inflation slowed unexpectedly, catching traders off guard as they prepare for the Federal Reserve’s policy decision later.
Sterling fell as much as 0.5% against the dollar to its lowest level since May as traders bet that the Bank of England is nearing the end of its hiking cycle, with only more rate increase now fully priced. UK bonds soared, with the yield on two-year gilts dropping 12 basis points to 4.88%, the lowest since Aug. 10.
The UK’s FTSE 250 index of domestic stocks jumped 1.5% after the inflation boost, with homebuilders sensitive to changes in interest rates leading the gains. Europe’s Stoxx 600 index also benefited from the improved sentiment, climbing for the first time in three days. US equity futures were steady, while a gauge of Asian stocks retreated.
Britain’s Consumer Prices Index rose 6.7% from a year earlier in August, the slowest pace in 18 months, and less than the 7% expected by economists. The chance of a quarter-point rate increase by the BOE at its meeting on Thursday fell, with the market assigning a less than 60% probability from 90% earlier, according to swap pricing.
“BOE policy makers must be very happy with the data, but it doesn’t change anything: they will raise rates, but it will probably be a dovish hike, similar to what the European Central Bank did last week,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris.
US Treasuries were steady after yields on both the five- and 10-year notes hit the highest levels since 2007 on Tuesday. The yen trimmed a rebound from its near 10-month low as US Treasury Secretary Janet Yellen said any intervention by Japan to support its currency would be understandable if it were aimed to smooth out volatility.
The focus will soon turn to the Fed, with Chair Jerome Powell and his colleagues widely expected to hold rates on Wednesday. Still, supply shocks such as climbing oil prices present the central bank with a quandary as they simultaneously boost inflation and curb economic growth. Surging energy costs played a role in tipping the US into recession in the mid-1970s, as well as the early 1980s and 1990s.
Aside from expectations of a hawkish hold, investors will focus on the Fed’s updated quarterly rate projections — known as the dot plot — that will be released at the conclusion of the policy meeting. High on the watchlist will be whether these forecasts continue to reveal a median view for one more quarter-point hike this year and whether forecasts for 2024 scale back the 100 basis points of rate reductions that officials foresaw in June.
“We believe the risk here is to the upside as the Fed may want to reinforce its message that interest rates are due to stay higher for longer,” said Julien Lafargue, chief market strategist for Barclays Private Bank.
Brent crude slipped below $94 per barrel after a recent rally, but with prices are still near a 10-month high.
Goldman Sachs Group Inc. analysts raised their forecast for crude back to triple digits as worldwide demand hits unprecedented levels and OPEC+ supply curbs continue to tighten the market. The Wall Street bank pushed up its 12-month forecast for Brent to $100 a barrel from $93. However, most of the rally “is behind us,” the bank said in a note.
Back in Asia, the offshore yuan was little changed after the People’s Bank of China reiterated its commitment to crack down on behaviors that disrupt the FX market. Chinese lenders earlier kept the one- and five-year loan prime rates — the latter being a reference for mortgages — unchanged, following the central bank’s move last week to hold policy rates steady as officials assess the economic impact of existing stimulus.
Key events this week:
- Federal Reserve policy meeting followed by Fed Chair Jerome Powell’s news conference, Wednesday
- Bank of Canada issues summary of its September policy meeting, Wednesday
- Eurozone consumer confidence, Thursday
- Bank of England policy meeting, Thursday
- US leading index, initial jobless claims, existing home sales, Thursday
- China’s Bund Summit, Friday
- Japan CPI, PMIs, Friday
- Bank of Japan rate decision, Friday
- Eurozone S&P Global Eurozone PMIs, Friday
- US S&P Global Manufacturing PMI, Friday
Some of the main moves in markets:
- The Stoxx Europe 600 rose 0.5% as of 9:43 a.m. London time
- S&P 500 futures rose 0.1%
- Nasdaq 100 futures rose 0.2%
- Futures on the Dow Jones Industrial Average rose 0.1%
- The MSCI Asia Pacific Index fell 0.8%
- The MSCI Emerging Markets Index fell 0.5%
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.1% to $1.0695
- The Japanese yen fell 0.1% to 148.05 per dollar
- The offshore yuan was little changed at 7.3069 per dollar
- The British pound fell 0.2% to $1.2369
- Bitcoin fell 0.2% to $27,145.13
- Ether fell 0.4% to $1,635.85
- The yield on 10-year Treasuries declined one basis point to 4.35%
- Germany’s 10-year yield was little changed at 2.73%
- Britain’s 10-year yield declined eight basis points to 4.26%
- Brent crude fell 1.1% to $93.31 a barrel
- Spot gold was little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Netty Ismail and Tassia Sipahutar.
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