Market Update – 28th September 2022

28th September 2022

Financial markets remained volatile after Chancellor Kwasi Kwarteng’s ‘mini-budget’ was badly received by markets and the pound struggled to make a substantial recovery after falling to an all-time low against the US dollar on Monday.

However, markets were somewhat reassured by the Bank of England’s Chief Economist Huw Pill who stated that the bank won’t hesitate to change interest rates to bring inflation closer to the 2% target, although the bank made the decision not to intervene with an emergency interest rate rise this week. As we mentioned in the Weekly Market Summary the market is concerned that the tax package will speed up the rate of price rises and force the BoE to raise rates further. Huw Pill said they would deliver a significant policy response but indicated that they would wait until the next meeting on the 3rd November.

The pound edged slightly higher against the dollar yesterday as the Treasury confirmed it would set out a medium-term fiscal plan on the 23rd November. It will include a forecast from the Office for Budget Responsibility, detailing an independent assessment of the impact of the government’s policies on the economy.

This morning the International Monetary Fund issued a warning to the UK government stating that “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal pack” – Kwasi Kwarteng may have to rethink his budget tax cuts.

Looking to the US, new orders for durable goods declined slightly by 0.2% in August. Orders for non-defence capital goods excluding aircraft (a proxy for investment in equipment) rose by 1.3% up from 0.7% in July. This was the biggest gain since January and demonstrates that businesses are continuing to invest in equipment.

US consumer confidence rose from 103.6 in August to 108 in September supported by a robust labour market and declining gas prices. The survey also revealed that consumers’ 12-month inflation expectations fell slightly for the first time since January as consumers’ concerns about inflation and fuel prices dissipated further. Whilst consumer confidence may be resilient in the US the Fed have made it clear that despite monetary policy tightening they remain data dependant and cognisant of further recessionary risks.

Giorgia Meloni, leader of the far-right Brothers of Italy party, claimed victory in Italy’s election on Monday and is on track to become Prime Minister as she looks to form the country’s most right-wing government since the end of the Second World War. Italy is already the second most indebted country in the Eurozone, and the new government is set to face serious challenges. Valuations remain some of the most attractive globally; this news will give the ECB something to think about as the new government could be a catalyst to jumpstart markets.

Industrial profits in China declined by 2.1% on year in August, less than markets expectations but more than the 1.1% drop in the previous period. The latest results can be attributed to a weakening yuan and a slowdown in factory activity due to severe heat waves. In order to counter the slowdown, Beijing has recently announced plans to accelerate the implementation of stimulus measures.

Still to come this week Eurozone unemployment, Eurozone CPI inflation; Chinese & Japanese industrial production.

Investment Management Team