Carry on up Threadneedle Street

The Bank of England is suffering a form of communication breakdown that’s left everyone in the market a bit dazed and confused. Governor Bailey yesterday roiled markets by ruling out extending the Bank’s gilt market intervention beyond Friday; but this is being contradicted privately by officials, according to reports. The pound promptly fell sharply on the comments with GBPUSD below 1.10 again, but is trading on unhelpfully mixed messages.

It was an unhelpful remark likely to lead to more, not less, instability in the immediate term, even if Bailey is confident that the market will function fine without the backstop. This morning the expected has happened and sources at the Bank are ‘privately’ briefing that of course the Bank would extend the intervention if financial stability were again at risk. Gilts were, predictably, sold at the market open, with the 30yr yield up 8bps at 4.89% and then pushing above 5% by lunch. The problem is the market is still working on mixed messaging from the Bank and this will need to be resolved soon. Pension stocks are down this morning – L&G and Aviva both -3.3% in early trade.

UK economy shrinks

The news on the economic front is not great. True the IMF says the UK grows the fastest in the G7 next year, but figures this morning show GDP fell by 0.3% between July and August. And there was more evidence that rising mortgage rates are impacting the economy and housing market. Barratt says this morning that private reservations are down sharply because of “increased wider economic uncertainty, where growing cost of living concerns have been compounded by increased mortgage interest rates and reduced mortgage availability”. Net private reservations per week fell to 188 from 281 a year ago. It reflets what we all know – soaring mortgage rates will crater the property market, delay purchases, force down prices and generally hurt just about everyone. BDEV shares sank 7% on the news, leading a smart decline for the housebuilders in early trading.

Sentiment weak ahead of tomorrow’s US inflation report

Sentiment in equity markets remains pretty dreadful, with global stocks hovering around 2-year lows. The S&P 500 closed down for a fifth day and the Nasdaq Composite notched its lowest close since July 2020. Asian markets stumbled as China said it won’t lift its zero covid policy. European markets opened mixed amid the conflicting BoE signals, the dollar eased back a touch as sterling recovered a bit of the Bailey comment losses. The yen fell to a fresh 24-year low. Oil continues to pull back from its breakout move as risk sentiment is pressured by the macroeconomic concerns – all eyes on the US CPI print tomorrow for a steer on what the Fed does next. Investors continue to struggle with a crap macroeconomic backdrop creating a strong risk aversion, persistently high inflation, uncertainty over upcoming earnings and how long central bank tightening goes on.  

Today

FOMC meeting minutes are due up and we have some central bank speakers including the ECB’s Lagarde. US PPI inflation figures come out ahead of tomorrow’s CPI release.