Bank of England

The Bank of England will start its delayed bond sales early next month, but will initially exclude the long-dated debt at the heart of recent market turmoil following the government’s ill-fated fiscal plans. The announcement of so-called quantitative tightening is a statement of intent from the central bank, which had been on the defensive for weeks after fallout from massive unfunded tax cuts forced it to start buying gilts again to avert a fire sale by pension funds. Starting QT is the next stage for Governor Andrew Bailey and puts the inflation fight back at the center of the bank.

Revenue Surge

Rates and currencies traders just handed Wall Street’s trading desks their best third quarter ever. Fixed-income trading revenue at the five largest US banks surged 22% to $15.8 billion in the period, trouncing analyst estimates. That, combined with a $10 billion equities-trading haul, handed the firms their best third quarter for the business on record. The better-than-expected results were largely fueled by stronger performance on desks dedicated to buying and selling interest-rate and currency products. Those asset classes have seen a surge in volatility as the Fed embarked on an aggressive plan to raise interest rates to temper inflation in recent months. 

Can´t Pause Yet

The Fed can’t pause its campaign of monetary policy tightening once its benchmark interest rate reaches 4.5% to 4.75% if “underlying” inflation is still accelerating, Minneapolis Fed President Neel Kashkari said. “Core services inflation — which is the stickiest of all — keeps climbing, and we keep getting surprised on the upside,” Kashkari said Tuesday during a panel discussion hosted by the Women Corporate Directors Minnesota Chapter. Investors currently see a peak around 4.9% early next year, according to prices of futures contracts. The Minneapolis Fed chief, who before the pandemic was known as the Fed’s most outspoken dove, has emerged this year as its biggest hawk.

Emergency Reserves

The Biden administration plans to release 15 million barrels from US emergency reserves and may consider significantly more this winter, in an effort to ease high gasoline prices that have become a liability for Democrats in next month’s midterm elections. President Joe Biden will announce the plan Wednesday. It’s the final tranche of oil from a program the White House began in the spring to release a total of 180 million barrels of crude from the Strategic Petroleum Reserve to address high gas prices stemming from Russia’s invasion of Ukraine among other factors. Biden’s team is keeping all options on the table to ensure stable domestic fuel supplies, a senior administration official said.

Tory Rebellion

Embattled UK Prime Minister Liz Truss faces a brewing parliamentary rebellion if she is forced to abandon a key Conservative manifesto commitment on pensions as part of a frantic austerity drive. Chancellor of the Exchequer Jeremy Hunt has refused to guarantee that he will stick to the Tories’ election pledge to raise the state pension in line with the highest of either inflation, wages or 2.5% — known as the “triple lock.” The uncertainty on pensions comes as government departments were told by the Treasury to find savings of up to 15% of their budgets. It poses a new political problem for Truss and Hunt, with many Tory members of Parliament representing large numbers of older constituents who typically form their core voter base.

Coming Up…

European stocks are on course for gains, while Asian shares wavered and US equity futures climbed as traders digested corporate earnings and the impacts of higher rates. Kashkari along with other Fed presidents Charles Evans and James Bullard take part in separate events. UK inflation is in the spotlight in wake of the government’s fiscal fiasco. Investors will look for clues on how fresh US chip curbs might affect ASML’s sales outlook as the company delivers earnings. Tesla, Atlas Copco and P&G also report.

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(Source: Bloomberg, Oct. 19-2022)