MARKET UPDATE 10.10.2022

Inflation continued to dominate the markets, US Fed governor Waller said last week that more needs to be done on interest rates and that the Fed should not pause until it sees firm evidence that inflation is easing.

Comments were echoed by Chicago Fed governor Evans, who called for policy to be more restrictive and sees the Fed Funds rate heading to 4.50-4.75% by next spring.

The Bank of England is very much on the same page with deputy governor Ramsden commenting that policy must stay the course despite the impact it is having on households and corporations. The FT’s Lex column said the mini-budget has made it much harder for the BoE to conduct QT and needs to be more aggressive on interest rates as a consequence. As such, it ventures that rate action has to compensate and expects a +1.25% hike next month with the markets currently pricing in +1%.

A story in the FT this morning commented that the BoE’s intervention in the bond market nearly two weeks ago had averted a fire sale and a self-reinforcing spiral that risked financial instability. Markets have been worried what happens when the time-limited action comes to an end this Friday.

This morning the BoE said it still expects to end operations in the long end of the gilt market on Friday, but said liability driven investment funds – seen as the centre of the crisis over the last couple of weeks – had made substantial progress to address their resilience from volatility over the past week. That said the Bank stands ready to intervene above its daily £5bn limit in gilt purchases if it sees a further squeeze in liquidity.

This week a fresh US earnings season begins, starting with some of the key banks and so the next fortnight is set to be a busy period for data releases. In addition, all eyes will be on Thursday’s US CPI print and whether or not inflation is finally starting to slip from multi-decade highs. The UK and Eurozone also have a busy calendar which may inform the next steps for valuations, although analysts are expecting the softest earnings growth since the early days of the recovery in Q3 2020.

Consequently the week did not end on a particularly positive note as equity and bond markets sold off in widespread fashion on Friday.

European and Asian markets were all weaker on Friday and the US experienced heavy setbacks across all major indices, but still ended higher for the week after strong gains on Monday and Tuesday.