UK inflation returns to 40-year high

Inflation in the UK accelerated in September to 10.1% y/y from 9.9% in August. The September print marks a return to the 40-year high hit earlier this year in July. Food prices were a considerable driver of higher prices last month with a measure of food costs up almost 15% y/y, its strongest level in more than 40 years. Fuel prices did move lower but that may be a short-lived relief as oil prices have since recovered some ground. The high inflation picture comes soon after the UK has endured considerable market volatility as the government has introduced and rescinded major tax cuts and is now looking for substantial cuts to public spending. With markets looking for some certainty and the high inflation story compelling them, the Bank of England is set to hike rates at its early November meeting, likely by as much as 100bps.

The final estimate for September inflation in the Eurozone was knocked slightly lower though it remains at record levels of 9.9% y/y. The revision lower was caused by lower inflation estimates in some peripheral economies though their own inflation levels remain in double digits: Latvia’s inflation for instance hit 22.2% in September. Even if the revision was lower the inflation print is still going to force the ECB to hike rates substantially at its next meeting in about a week’s time. A 75bps hike, the second in a row from the ECB, looks likely at next week’s meeting.

US housing starts fell by 8.1% in September 1.44m with single-family builds at their slowest pace since Q2 2020. Housing data from the US is showing the most apparent effects of higher interest as nearly all variables are turning solidly negative. Homebuilder confidence data released earlier in the week also dropped to its weakest level since May 2020.

The Federal Reserve’s Beige Book of unofficial indicators around the economy all pointed to concerns around inflation being a major concern for households and families across the US. Lower-income Americans were highlighted as being particularly at risk of higher costs with affordability of basic services such as heating and food an issue across the country.

Qatar is reportedly considering a USD 2.5bn investment into Egyptian companies, including its mobile operator.

Today’s Economic Data and Events

• 11:20 ID Bank Indonesia 7D reverse repo: forecast 4.75%
• 15:00 TU One-week repo rate: forecast 11%
• 16:30 US initial jobless claims Oct 15: forecast 230k
• 18:00 US existing home sales Sept: forecast 4.69m

Fixed Income

• US Treasuries fell sharply overnight as the inflation narrative globally remains too hot—inflation prints in the UK and Canada were out yesterday and remain elevated. The 2yr UST yield added almost 13bps to 4.5563% while the 10yr added about the same to settle at 4.1335%.
• James Bullard, president of the St Louis Fed, said that the Fed may be able to end its “front loading” of large hikes early in 2023 and can then move to “ordinary monetary policy” which may mean 25bps hike increments.
• UK gilts swung higher overnight even as the political drama in the UK continues following the dismissal of the Home Secretary and an apparent fracas within the ruling Conservative party in House of Parliament. Yields on the 10yr gilt dropped by about 7bps to 3.866%. Elsewhere in Europe bond markets fell with the 10yr gilt yield up 9bps to 2.367% and similar maturity Italian bonds adding 8bps to 4.756%.
• Islamic Development Bank is in the market with a USD 5yr sukuk with initial pricing at SOFR+mid 60s according to Bloomberg.

FX

• The US dollar pulled substantially higher again overnight as US yields popped higher. Gains were broadbased with EURUSD slumping by 0.86% to 0.9773 while USDJPY added another leg to settle at 149.90. A test of 150 looks a near certainty unless there is considerable intervention from the ministry of finance of Bank of Japan.
• Sterling dropped by nearly 0.9% overnight to 1.1219 as there remains poor clarity on the policy path ahead for the UK government and Bank of England. The threat of the government collapsing remains very prevalent as ministers have already departed government or have intimated that they will do so.
• Commodity currencies fared little better, all weakening against the US dollar. USDCAD added 0.2% even as the hotter than expected inflation print may mean the Bank of Canada needs to persist with further tightening. AUDUSD dropped by 0.6% to 0.6270 while NZDUSD fell 0.25% to 0.5671.

Equities

• Global stock markets pared some of their recent gains yesterday, with drops in most major indices. In the US, the Dow Jones, the S&P 500 and the NASDAQ dropped -0.3%, -0.7% and -0.9% respectively.
• European markets were also down with both the FTSE 100 and the DAX losing -0.2% and the CAC -0.4%.
• Locally, the ADX lost -0.2% and the DFM closed -0.6% lower. The Tadawul closed down -0.1% and the EGX 30 -0.1%.

Commodities

• Oil prices settled higher with Brent futures up 2.6% at USD 92.41/b and WTI adding 3.3% to USD 85.55/b. The stronger moves come despite plans from the US to offer more of its strategic petroleum reserves to push against high fuel prices.
• Inventory data from the US showed a 1.7m bbl drop in commercial crude inventories along with modest draws in gasoline stocks. Oil production ticked up marginally to 12m b/d while there was a decent gain in product demand of 1.5m b/d to 20.8m b/d.

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