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UK Political Crisis has Demanded its Ultimate Sacrifice


The UK political crisis has demanded its ultimate sacrifice. Liz Truss was forced to resign after being just 44 days in office – the shortest tenor ever. The race for a new PM has already begun and it may be a short one. Contenders need the backing of 100 Tory lawmakers just to get on the ballot. A new leader may already be picked by Monday. Rishi Sunak and Penny Mordaunt are leading in the bookmaker odds with none other than Boris Johnson on the third place. Sterling briefly rallied on Truss’ resignation but closed the day unchanged eventually (EUR/GBP 0.871). Gilt yields rose 3.5 bps (10y) to 9.5 bps (5y), again with the exception of the 30y (-2.9 bps). It was part of the seemingly unstoppable broader trend though. US yields again added 5.3 bps to 9.4 bps to new cycle highs without concrete news other than Fed officials (Harker, Cooke) reiterating the need for additional tightening. US money markets fully price in a 5% terminal rate. German bonds outperformed (and for the first time in days also marginally vs swaps), gaining between 2-3.2 bps across the curve. Wall Street wavered opening gains as yields gained traction in US dealings. On currency markets, USD/JPY broke above 150 triggering nothing else but verbal interventions for now. EUR/USD stayed below 0.98.

The greenback is again better bid during Asian trading hours this morning, strengthening further against all G10 peers. USD/JPY rises further north of 150 and USD/CNY is attacking previous (intraday) cycle highs around 7.25. US Treasury yields drift higher. 3% headline inflation in Japan puts Japanese govies under pressure. The BoJ steps in with unscheduled buying. Interestingly, the spread between Japanese 10y swap and the government bond yield is at its highest since at least 2009. Asian equities trade mixed.

The economic calendar today contains EMU October consumer confidence and UK retail sales. But the latter will surely be overshadowed by the PM contest. The recent political developments also mean a delay of the fiscal statement beyond October 31. That implies the Bank of England will have its policy meeting without this input early November. Without clear market drivers for today, we expect the current market trends simply to continue: i.e. core bond yields grinding higher and a stronger dollar. Reports of a Russian troop buildup at Ukraine’s borders to the north won’t help equities, which already face difficult circumstances.

News Headlines

Both Japan’s headline inflation and core inflation ex fresh Food, in September rose to 3.0% Y/Y. It marked the sixth consecutive month that the ex-fresh food measure printed above the BOJ’s 2% target. Inflation excluding both fresh food and energy also rose to 1.8% y/y from 1.6%. Still the rise in inflation was mainly driven by higher goods prices (5.6% Y/Y). Services prices only gained 0.2% compared to the same month last year. The rise inflation occurs as the yen extends its protracted weakening. At  USD/JPY 150.4, the yen is trading more than 30% weaker against the dollar YTD, putting further upward pressure on price of imported goods. However, BOJ governor Kuroda, who stays at the helm of the BOJ till April next year recently kept the assessment that inflation was mainly cost-driven and that the Bank wants to see higher wages as a sign that inflation is returning sustainably higher. The BOJ will hold its next policy meeting Friday next week.

At least two governors of the Czech national bank still keep the debate alive on further interest rate hikes at the next CNB meeting even as it stopped raising rates in June. According to a Reuters article referring to an interview with newspaper E15, CNB Vice governor Mora indicated that he still sees a case for the policy rate (currently 7.0%) to be raised by at least 50 bps as world central banks continue tightening, the domestic labour market remains tight and government fiscal policy stays expansionist. A more transparent policy of further rate hikes could also reduce the need for FX interventions. Yesterday, CNB’s Dedek also indicated that he would raising interest rates further if the koruna would come under pressure. However, for now he doesn’t see narrowing interest rate differentials putting additional pressure on the koruna.

KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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