The dramatic plunge in the pound and Gilts is unbelievable and to the point where at least the pound is likely a buy. The 14 day RSI is down to just 15 and the 7 day is at just 8. The 14 day is matching the lowest since March 2020 and January 2016 before that which was a few months before the Brexit vote. The 2 yr Gilt yield is spiking by 58 bps and is now up 100 bps in just two trading days to 4.54%. The 10 yr yield is higher by 28 bps and up by 60 bps in two days to 4.11%. I get the budget blowout of very expensive energy subsidies at the same time taxes will be cut across the board (preventing the corporate rate from going up, cutting the high top tax rate, reducing the stamp tax, eliminating the bonus cap for bankers, etc…) but these are all steps that will make the UK very long term competitive which would in turn invite a lot of investment. The FTSE 100 is down by .8% and the FTSE 250, mostly domestic based companies, is down by 1.5%.
The bond weakness in the UK is also a global theme again today and it started again in Asia overnight.
I will say this on the fiscal condition worries the markets have about the UK. Just imagine if that attention at some point shifts to the US with our out of control debt and deficits situation.
Post Fed meeting there is a lot of Fed talk this week from both voting and non-voting members. Powell, Brainard, Collins, Bostic, Logan, Evans, Bullard, Kashkari, Daly, Bowman, Williams, Barkin, and Mester will all be giving us their thoughts. We know that many are looking for signs of buckling knees in their fight against inflation because of the growing economic impact. We’ll also see if there are any dollar comments.
The Japanese September composite PMI rose back above 50 at 50.9 from 49.4 in August. The components though were mixed as services rose to 51.9 from 49.5 but manufacturing slipped to 51 from 51.5. S&P Global said “A further loosening of restrictions aided an expansion in September, but overall growth remains subdued as inflationary pressures and deteriorating global economic growth weigh on activity in both the manufacturing and services sectors…Looking ahead, businesses are reporting concerns around the economic outlook amid steep cost pressures and the rising likelihood of a global economic downturn. The remarkable weakness we’ve seen in the year to date in the yen continues to push up price pressures, with companies struggling to fully pass on these higher cost burdens to clients. Subsequently, business confidence slumped to a 13 month low in September.”
So, it is still the aggressive monetary stance of the BoJ that is resulting in the yen weakness but to cover himself BoJ Governor Kuroda comes out today and says about the Finance Ministry buying of yen, “The intervention was conducted by the finance minister’s decision as a necessary means to deal with excessive moves and I think it was appropriate. The intervention and monetary easing are complementary.” Complementary?! The 10 yr JGB yield closed right at .25% and continues to test the BoJ. Of note though, the 40 yr yield is breaking out to the upside, jumping by 10 bps, a huge move for them, to 1.57%. That is the highest since September 2015. Continue to watch the 40 yr as it’s the furthest out on the JGB yield curve and thus the least manipulated by YCC.
40 yr JGB Yield
The September German IFO business confidence index fell to 84.3 from 88.6 and that was well below the estimate of 87. The current assessment fell 3 pts m/o/m and the Expectations component was down by 5.3 pts to 75.2. The IFO said succinctly, “Sentiment in the German economy has deteriorated considerably…The German economy is slipping into recession.” No argument here.
IFO
Lastly, on the heels of the now hotel quarantine free shift in Hong Kong for incoming visitors (although more needs to be done to allow them to go out to bars and restaurants immediately instead of waiting 3 days), tour groups from mainland China can now finally visit Macau again. Another step to a broader China reopening we all must hope for, for the sake of the global economy.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.