Daily Market Outlook, September 12, 2022

Overnight Headlines

Despite expectations of further outsized interest rate moves from some of the major central banks around the world, equities across the Asia-Pacific region are largely trading higher this morning. In Japan, sentiment is being supported by news that the country is planning to scrap a 50,000 people per day limit on the number of foreign arrivals by October, a sign that it is further relaxing its Covid restrictions.

The hawkish messaging of most major central banks remained in place over the past week as officials signalled their continued commitment to act to lower inflation. That maintained general upward pressure on global government bond yields, with benchmark US 10year Treasury yields, for instance, rising back above 3.3%. The European Central Bank (ECB), which only started raising interest rates in July, increased them again last Thursday, this time by a record 75bp. With inflation remaining “far too high”, President Lagarde pledged to hike rates further in the next few meetings despite forecasting a marked economic slowdown next year. The possibility of another 75bp rise next month has not been ruled out. Similarly, remarks from US Federal Reserve Chair Powell also suggest that another 75bp increase is on the table at their meeting next week (20/21 September). Powell stated that “we need to act now forthrightly”. Meanwhile, on the domestic front, markets continued to see a strong possibility of a 75bp hike from the Bank of England at its next meeting, which has been pushed back from this Thursday to the 22nd of September – a day after the Fed meeting.

A busy UK data slate this week is likely to provide key inputs into the MPC’s decision. Earlier this morning, the latest monthly GDP report for July showed a smaller-than-expected rise of 0.2% m/m, with weakness in industrial (-0.3% m/m) and construction (-0.8% m/m) activity tempering the impact of a strong rebound in services activity (0.4% vs -0.5% in June). As a guide, if the level of economic activity was unchanged in August and September, GDP growth in Q3 would be flat, versus the Bank of England’s forecast of a 0.4% rise.

The rest of the day is void of any major data with comments from two ECB officials (Guindos and Schnabel) providing the focus for markets. Following the ECB’s decision to hike by 75bp at its meeting last week, the market will be watching for clues that the Governing Council will be following up with a similar move at its next meeting in October.

Early tomorrow morning at 7am, a tight UK labour market is expected to be reaffirmed in the latest release, supporting further policy tightening. There were some tentative signs of softening in last month’s report, including falling (but still high) levels of unfilled vacancies. Despite expecting some softening in employment growth, markets expect the unemployment rate to fall to 3.6% in the three months to July due to rising inactivity and regular pay growth (excluding bonuses) to accelerate to 5.0%. Later in the week, UK inflation and retail sales reports for August are due.