Yields rising

Jeremy Thomson-Cook
Jeremy Thomson-Cook 18 October 2021

GBP: BoE and N.Ireland in focus

EUR: Data disappoints  

USD: Strong retail sales

Sterling

BoE Governor Bailey added further to the bank’s already hawkish stance over the weekend stating, “despite inflation being temporary the bank will act if there is a risk to medium-term inflation and to medium-term inflation expectations”. He also went on to say “and that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act.” 
Although he does not believe there is a general pattern of labour market pressure as wages climb strongly in some sectors but less so in others.

With markets already fully pricing in a rate hike of 0.15% this year and three more next year, taking the base rate up to 1%, Bailey’s comments are unlikely to push GBP significantly higher.

But despite the upbeat rhetoric, Johnson’s government faces an unfortunate fact: the U.K.’s economy isn’t growing at the rate they desire. August's GDP figures only rose by 0.4%, which means Q3 growth will likely come in at only half of the Bank of England’s 3% forecast. The economy is still 5% smaller than it would have been if growth had continued on its 2010 to 2019 pre-pandemic trajectory; in contrast, the U.S. achieved this by Q2 2021.

Brexit negotiations over the Northern Ireland protocol are set to continue with both sides seemingly at loggerheads over EU governance. With the UK steadfast in their insistence that it is for the UK, and UK only to govern N. Ireland post Brexit.
 UK Brexit Minister, Lord Frost, has warned that his government will be prepared to suspend aspects of the protocol – by triggering its Article 16 mechanism – if it cannot reach agreement with the bloc on changing how it operates. That has raised the prospect of the EU taking retaliatory action, potentially in the form of further restrictions on trade with the UK.

Looking ahead, the main economic data releases due this week are Wednesday’s inflation report and Friday’s latest retail sales data.

 

Euro

The single currency continues to trade in a very tight range as the ECB’s dovish stance on interest rates continues. Last week saw ECB President Lagarde and a host of members continue to beat the same “inflation is transitory” drum. The recent economic data out of the Eurozone has been significantly weaker than forecast, this, coupled with surging energy costs have led markets to continue to use the negative yielding Euro as a funding currency.    

There is not much due on the economic docket this week, with Wednesday’s inflation data being the most significant.

 

US dollar 

Following the Evergrande loan defaults, the Chinese government’s announcement that they have instructed lenders to ease mortgage conditions helped to improve the broader risk tone in markets. The Dollar suitably weakened across the board, allowing the more risker currencies like GBP, AUD, NZD and CAD to recover some of their recent heavy losses.

Friday’s latest retail sales data handily beat expectations, proving yet again to never write off the US consumer. 

US yields drifted from their recent highs as markets eagerly await further monetary policy direction which should come at the next FOMC meeting due November 2/3 in the form of the FED announcing they will commence asset purchase tapering this year. 

A light data calendar this week for the US lies ahead with the release of the Fed’s Beige Book due Wednesday being the highlight.

 

Market rates

Today's Interbank Rates at 08:32 against sterling movement vs Friday.

Euro 1.187 ↑
US dollar 1.374 ↑
Australian dollar 1.856 ↑
South African rand 20.15 ↑
Japanese yen 157.2 ↑

 

Have a great day.