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The Bank of England decision promised to be a cliff hanger, and it was, even for the nine people deciding what to do.
Breaking a string of 14 consecutive rate rises, the Bank of England opted to hold rates at 5.25%.
It was a narrow 5-4 vote in favor of the pause, with Gov. Andrew Bailey on the side of the majority.
The…
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Inflation in the U.K. surprisingly eased in August against expectations it would accelerate, a welcome showing for central bankers just a day ahead of an interest-rate decision.
The U.K. consumer price index fell a touch to 6.7% year-over-year in August from 6.8%, the Office for National Statistics said Wednesday.
CPI was expected by economists…
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The U.S. dollar is proving its haters wrong.
Not only is the buck defying the expectations of Wall Street strategists who had anticipated that it would weaken this year, it’s also proving once again that talk of de-dollarization has been over-hyped.
In financial markets, a gauge of the dollar’s value against its biggest rivals is nearing its highest level in six months. The ICE U.S. Dollar Index
DXY,
a gauge of the dollar’s strength against the euro
EURUSD,
and other major currencies like the Japanese yen
USDJPY,
and British pound
GBPUSD,
traded at its highest level since early June on Friday after Federal Reserve Chairman Jerome Powell helped catapult it higher by talking up the possibility of more interest-rate hikes.
The index was adding to those gains on Monday, trading 0.1% higher at 104.13, according to FactSet data. A break above 104.70 would put it at its highest intraday level since March 16. The index is up 0.5% since the start of the year, having erased earlier year-to-date losses over the past six weeks.
Earlier this year, dollar weakness occurred against the backdrop of U.S. rivals like China and Russia making strides in their efforts to wean themselves off the buck.
But despite their efforts, data released last week by SWIFT, the nexus of international interbank financial transactions, showed that the dollar has never been more popular as a means of settling international trade and transactions.
SWIFT’s data showed that 46% of interbank payments conducted on the platform in July involved the U.S. dollar, a record high. The data also showed that the Chinese yuan’s share of international payments had ticked higher while the euro’s declined.
As if to underscore this point, the data from SWIFT arrived late last week just as a summit hosted by the BRICS nations in Johannesburg, South Africa, was breaking up.
Rather than being a watershed event for opponents of the U.S. dollar, as some had feared, statements from the group’s members revealed internal disagreement on the subject of a BRICS currency intended to offer an alternative to the greenback.
What’s more, while the economic alliance announced plans to admit a spate of new member nations in its first expansion in 13 years, one notable holdout seemed to spoil the party.
Indonesian President Joko Widodo opted to keep his country, one of the world’s most populous, with a fast-expanding economy, out of the economic alliance, at least for now.
To be sure, as MarketWatch reported back in April, talk of de-dollarization is hardly a new phenomenon, but it has received renewed attention as China, Russia and others have redoubled efforts to try and push for countries to conduct more trade in their own currencies as opposed to the dollar.
But Russia and China aren’t alone in their disappointment at the dollar’s resilience.
Read more: Opinion: China is nowhere near deflation, and global investors aren’t ready for what’s coming
A compilation of 2023 year-ahead outlooks produced by Bloomberg News back in December showed investment houses in Europe and the U.S. widely expected the buck to weaken this year, with some reasoning that the two-decade high reached by the dollar index in late September likely marked its peak for the cycle.
The ICE index traded as high as 114.78 on Sept. 28, its highest level since May 2002, according to FactSet data. The milestone marked the peak of a torrid rally that saw the buck emerge as one of the few havens from a punishing selloff in stocks and bonds that defined global markets in 2022. But the gauge has fallen 9.3% since then.
Now, with real yields in the U.S. pushing higher and Federal Reserve Chairman Jerome Powell hinting at the possibility of more interest-rate hikes later this year, strategists say the conditions are ideal for the U.S. dollar to climb even higher.
“Interest-rate differentials and relative economic strength are the foundation [of dollar strength],” Matt Miskin, co-chief investment strategist for John Hancock Investment Management, said during a phone interview with MarketWatch.
China’s struggles to revive its flagging economy have helped bolster the dollar while pushing the Chinese yuan
USDCNY,
toward its weakest level since late last year. The offshore yuan traded at 7.29 to the dollar on Monday, near its weakest level since November.
Read this next: Opinion: The debt supercycle that hit the U.S. and Europe has now come for China
A weakening eurozone economy has weighed on the euro and boosted the dollar. PMI survey data released earlier this month showed Europe’s services sector weakening alongside manufacturing. GDP data released by Eurostat, Europe’s official economic statistics agency, has been tepid compared to the U.S. The latest reading on second-quarter GDP put it at 0.3%.
Right now, the dollar will be tough to beat given the twin tailwinds created by rising real interest rates and still-robust economic growth.
The yield on the 10-year Treasury Inflation-Protected Security note
912828B253
was trading north of 2.2% Friday, according to data from the St. Louis Fed. The 10-year TIPS yield hit its highest level since 2009 earlier this month when it broke north of 2%. The inflation-protected security is often cited as a proxy for U.S. “real” yields, which refers to the return bond investors receive after adjusting for inflation.
On the growth side of the equation, the Atlanta Fed’s GDPNow forecast estimated the rate of growth for the third quarter at 5.9% according to its latest reading dated Thursday. A year ago, even the most optimistic economists on Wall Street were expecting growth of about 2%, and top Fed officials had a median projection of 1.2% growth for 2023, according to projections released in September.
“It’s hard to beat the dollar when it is a high yielder among safe havens in a risk-off environment,” Steve Englander, head of North America macro strategy at Standard Chartered, said in comments emailed to MarketWatch.
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The pound
GBPUSD,
fell below $1.27 on Wednesday after worse-than-expected PMI data. The S&P Global/CIPS flash U.K. composite PMI fell to a 31-month low of 47.9 in August from 50.8 in July. The released blamed a faster fall in new orders for ending the six month run in positive territory over 50. The pound fell to $1.2687 from $1.2732. Earlier, eurozone PMIs fell to a 33-month low.
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The Bank of England on Thursday matched the U.S. Federal Reserve by hiking interest rates by a quarter percentage point.
The 7-2 decision, the eleventh consecutive increase, brings the U.K. base rate to 4.25%, and comes after data showed inflation surprisingly accelerated in February to a year-over-year rate of 10.4%.
“Headline CPI inflation had surprised significantly on the upside and the near-term path of GDP was likely to be somewhat stronger than expected previously,” the Bank of England said in the simultaneously published minutes of the meeting. “The members put some weight on the possibility that the stronger domestic and global outlook for demand was also being driven by factors over and above the weaker path of energy prices, given that the strengthening had at least in part preceded the falls in prices.”
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the central bank said.
The central bank did discuss the banking sector, and the failure of the U.S.’s Silicon Valley Bank and the run-up to UBS’s
UBS,
purchase of Credit Suisse
CS,
SVB’s U.K. subsidiary was bought by HSBC for £1.
The central bank’s financial policy committee said the U.K. banking system maintains robust capital and strong liquidity positions and can “continue supporting the economy” even as interest rates rise.
The pound
GBPUSD,
traded over $1.23 after the decision. The yield on the 2-year gilt
TMBMKGB-02Y,
however slipped 7 basis points to 3.42%, after a big rise on Wednesday when the inflation data came out.
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U.K. consumer prices jumped 10.4% in February, from a 10.1% rise in January, the National Statistics Office reported Wednesday. The increase was higher than the 9.8% expected by a consensus of economists polled by FactSet Research. The Consumer Price Index including owner occupiers’ housing costs (CPIH) rose by 9.2% in the 12 months to Feb 2023, up from 8.8% in Jan 2022. The fresh jump in prices comes a day ahead of a decision by the Bank of England’s Monetary Policy Committee. The British pound
GBPUSD,
jumped on the data, last up 0.4% to $1.2261.
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The Bank of England on Thursday slowed the pace of interest-rate hikes down to a half point, as the U.K. central bank balances a need to fight inflation with signs the economy is decelerating.
The Bank of England increased its main interest rate to 3.5% from 3%. There were two votes for no change and one for a 75 basis point hike.
U.K. inflation…
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The Bank of England made its largest interest-rate increase in three decades in response to inflation that the central bank still expects to accelerate.
By a 7-to-2 vote, the U.K. central bank voted to lift rates by a three-quarters percentage point to 3%, as inflation hit a 40-year high in September. The central bank said inflation will further accelerate to 11% in the fourth quarter.
There was one vote, from Swati Dhingra, for a half-point increase, and another, from Silvana Tenreyro, for a quarter-point rise. Both are external members of the central bank’s monetary policy committee.
It was the first gyrations since the turmoil in financial markets that prompted the BOE to step in with a temporary bond purchase program.
“These had partly reflected global developments, although U.K.-specific factors had played a very significant role during this period,” the central bank dryly said of the market reaction to the tax-cut proposals produced by Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng, both of whom have resigned.
The U.K. central bank has now started a delayed bond selling program, and Chancellor Jeremy Hunt has backtracked on the tax-cut proposals as he readies a new “autumn statement” due in mid-November.
The pound dropped despite the central bank matching the Fed’s three-quarter point rate hike. That’s because of a comment found within the minutes of the meeting, that a majority felt rates would not have to go as high as the implied 5.25% path in financial markets.
The pound
GBPUSD,
was weaker on the day at $1.1235 from $1.1392 — though much of that move came before the actual BOE decision — while the 2-year gilt
TMBMKGB-02Y,
rose 10 basis points to 3.08%.
“This will most likely mark the peak in pace of tightening, especially with the Bank highlighting financial markets are pricing too much too soon. Next up for the U.K. will see the focus shift to the autumn statement to see what the chancellor’s fiscal plans are, but in the meantime the headlines point to gilts being relatively more supported, however the currency less so,” said Edward Hutchings, head of rates at Aviva Investors.
Tim Graf, head of EMEA macro strategy at State Street, said the peak rate is likely to be closer to 4% to 4.25%.
“The accompanying messaging was clearly dovish, with the MPC noting the economy was already in the midst of a recession it expects to last into 2023, that inflation will likely fall sharply over the next two years and citing pricing for terminal rates as likely too high, limiting the need to hike aggressively,” he said.
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Rishi Sunak will become the next U.K. prime minister after his last competitor, Penny Mordaunt, withdrew, just minutes before a deadline to get support from 100 lawmakers. Sunak, the former chancellor of the exchequer, will become the first ethnic minority leader of the U.K. Sunak is set to speak in the next half hour.
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U.S. stock futures gave up strong early-session gains overnight after Wall Street notched its best week since June.
After initially surging about 300 points, or 1% on Sunday evening, Dow Jones Industrial Average futures
YM00,
were last about flat at midnight Eastern, while S&P 500 futures
ES00,
and Nasdaq-100 futures
NQ00,
similarly gave up sharp early gains.
The U.S. Dollar Index
DXY,
nudged higher, while the British pound
GBPUSD,
surrendered much of an afternoon rally fueled by the possibility that Rishi Sunak will be Britain’s next prime minister, after Boris Johnson bowed out of the running. Crude prices
CL.1,
ticked slightly higher Sunday.
On Friday, the Dow Jones Industrial Average
DJIA,
gained 748.97 points, or 2.5%, to close at 31,082.56. The S&P 500
SPX,
climbed 86.97 points, or 2.4%, to finish at 3,752.75, and the Nasdaq Composite
COMP,
rose 244.87 points, or 2.3%, to end at 10,859.72.
The three major indexes scored their biggest weekly percentage gains since June last week. For the week, the Dow rose 4.9%, the S&P 500 gained 4.7% and the Nasdaq advanced 5.2%. Yields on 10-year Treasury notes
TMUBMUSD10Y,
ended Friday at 4.228%.
Investors were heartened by reports that the Fed may back off slightly from its aggressive rate-hiking policy later this year.
The upcoming week is the busiest of the third-quarter earnings season, with 165 S&P 500 companies, including 12 Dow components reporting. That includes earnings from Big Tech companies Alphabet
GOOGL,
Amazon
AMZN,
Apple
AAPL,
Meta
META,
and Microsoft
MSFT,
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LONDON — Former British Prime Minister Boris Johnson announced Sunday he will not run to lead the Conservative Party, ending a short-lived, high-profile attempt to return to the prime minister’s job he was ousted from little more than three months ago.
His withdrawal leaves former Treasury chief Rishi Sunak the strong favorite to become Britain’s next prime minister — the third this year — at a time of political turmoil and severe economic challenges. He could win the contest as soon as Monday.
The British pound
GBPUSD,
advanced Sunday on hopes Sunak would be more fiscally austere.
Read more: Who is Rishi Sunak, now the front-runner for U.K. prime minister?
Johnson, who was ousted in July amid ethics scandals, had been widely expected to run to replace Liz Truss, who quit last week after her tax-cutting economic package caused turmoil in financial markets, was rapidly abandoned and and obliterated her authority inside the governing party.
Johnson spent the weekend trying to gain support from fellow Conservative lawmakers after flying back from a Caribbean vacation and held talks with the two other contenders, Sunak and House of Commons Leader Penny Mordaunt.
Late Sunday he said he had amassed the backing of 102 colleagues, more than the threshold of 100 needed to make a ballot of lawmakers on Monday.
But he was far behind Sunak in support, and said he had concluded that “you can’t govern effectively unless you have a united party in Parliament.”
The prospect of a return by Johnson had thrown the already divided Conservative Party into further turmoil. He led the party to a thumping election victory in 2019, but his premiership was clouded by scandals over money and ethics that eventually became too much for the party to bear.
In his Sunday statement, Johnson insisted he was “well placed to deliver a Conservative victory” in the next national election, due by 2024. And he said that he likely would have won a ballot of Conservative Party members against either of his rivals.
“But in the course of the last days I have sadly come to the conclusion that this would simply not be the right thing to do,” he said. “Therefore I am afraid the best thing is that I do not allow my nomination to go forward and commit my support to whoever succeeds.”
But he hinted he might be back, saying: “I believe I have much to offer but I am afraid that this is simply not the right time.”
After Truss quit on Thursday, the Conservative Party hastily ordered a contest that aims to finalize nominations Monday and install a new prime minister — its third this year — within a week.
The clear favorite now is Sunak, who has support from more than 140 lawmakers, according to unofficial tallies. Mordaunt is backed by fewer than 30.
If both make the ballot, the 357 Conservative lawmakers will hold an indicative vote on Monday to show their preference before the choice goes to the 172,000 party members around the country. If Mordaunt does not reach 100 nominations, Sunak will win by acclamation.
Sunak, 42, was runner-up after Truss in this summer’s Tory leadership race to replace Johnson. On Sunday, he confirmed he was running again in the latest leadership contest.
“There will be integrity, professionalism and accountability at every level of the government I lead and I will work day in and day out to get the job done,” Sunak said in a statement.
Johnson’s exit came only hours after allies insisted he would run. Business Secretary Jacob Rees-Mogg told the BBC on Sunday that he spoke with Johnson and “clearly he’s going to stand” after flying back to London Saturday from a vacation in the Dominican Republic.
But Northern Ireland minister Steve Baker, a former backer of Johnson and an influential politician within the Conservative Party, warned a Johnson comeback would be a “guaranteed disaster.” Baker noted that Johnson still faces an investigation into whether he lied to Parliament while in office about breaking his government’s own coronavirus restrictions during parties at Downing Street.
If found guilty, Johnson could be suspended as a lawmaker.
“This isn’t the time for Boris and his style,” Baker told Sky News on Sunday. “What we can’t do is have him as prime minister in circumstances where he’s bound to implode, taking down the whole government … and we just can’t do that again.”
Truss quit Thursday after a turbulent 45 days, conceding that she could not deliver on her botched tax-cutting economic package, which she was forced to abandon after it sparked fury within her party and weeks of turmoil in financial markets.
Sunak, who was Treasury chief from 2020 until this summer, steered Britain’s slumping economy through the coronavirus pandemic. He quit in July in protest at Johnson’s leadership.
In the summer contest to replace Johnson, Sunak called promises by Truss and other rivals to immediately slash taxes reckless “fairy tales” and argued that soaring inflation must be controlled first.
Tory voters backed Truss over Sunak, but he was proved right when Truss’ unfunded tax-cutting package triggered chaos in the markets in September. Now the task of stabilizing Britain’s wobbling economy is likely to fall to him.
MarketWatch contributed to this report.
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U.K. bond yields tumbled on Monday ahead of a planned statement from new Chancellor of the Exchequer Jeremy Hunt laying out budget plans ahead of the Oct. 31 medium-term plan. The yield on the 30-year gilt
TMBMKGB-30Y,
fell 36 basis points to 4.49%, while the pound
GBPUSD,
rose to $1.1257. Hunt also gave a series of interviews over the weekend and is expected to eliminate most of other tax cuts laid out in the mini budget.
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U.K. bond yields continued to drop on Friday, on expectations the U.K. government will further backtrack on its tax cut plans and that U.K. Prime Minister Liz Truss will fire Chancellor of the Exchequer Kwasi Kwarteng.
Kwarteng was photographed entering Downing Street after flying home early from the International Monetary Fund meeting in Washington, D.C. Truss’s office has announced a press conference. Both The Times and the Financial Times newspapers reported Kwarteng will be fired.
The yield on the 30 year gilt
TMBMKGB-30Y,
— which was high as 5.1% as recently as Wednesday — fell 28 basis points to 4.27%.
The yield on the 10-year gilt
TMBMKGB-10Y,
dropped 25 basis points to 3.95%. Yields move in the opposite direction to prices.
The pound
GBPUSD,
fetched $1.1273, down from $1.1331 on Thursday.
Kwarteng in recent interviews has done nothing to douse speculation the U.K. government will further pare its tax-cut plans.
Speculation of further U-turns has centered around corporate tax cuts in particular. Other tax cuts that could be reversed include the planned personal income-tax reduction to 19% from 20%.
The government has already relented on a planned cut for those making above £150,000. Financial markets gyrated after Kwarteng announced its mini-budget, which called for some £45 billion in tax cuts on top of capping energy prices. Investec Securities estimates the total cost of the stimulus to be on the order of £150 billion.
A medium-term fiscal plan, as well as an independent forecast from the Office of Budget Responsibliitiy, is due at the end of October.
The Bank of England’s emergency bond-buying plan — designed to ease tensions for pension funds — is due to expire on Friday.
The central bank says it’s purchased £17.8 billion in securities.
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U.S. stocks dropped sharply Friday, with major indexes posting their lowest finishes since 2020 and logging a third straight quarterly decline as investors grew more fearful that aggressive interest rate hikes by the Federal Reserve will drive the economy into a downturn in an attempt to quell inflation.
The drop left the Dow and S&P 500 at their lowest since November 2020, while the Nasdaq posted its lowest close since July 29, 2020. The Dow dropped 8.8% in September, while the S&P 500 tumbled 9.3% and the Nasdaq lost 10.5%.
For the quarter, the Dow dropped 6.7%, the S&P 500 declined 5.3% and the Nasdaq gave up 4.1%.
In keeping with the historical pattern, U.S. stocks suffered during the month of September as an assertive Federal Reserve helped push Treasury yields and the dollar higher, which in turn undermined equity valuations.
See: It’s the worst September for stocks since 2008. What that means for October.
Investors on Friday digested a reading from the personal consumption expenditure inflation index for August, which showed that core consumer prices climbed by 0.6% last month, more than Wall Street’s forecast of 0.5%. The core inflation measure excludes volatile food and energy prices.
See: Cheaper gas holds down inflation, PCE shows, but the cost of everything else is still going up fast
“That means the Fed will remain hell-bent on killing inflation. And the best way to do that is to increase rates, kill the housing market, and get rental costs down. The PCE doesn’t have housing and rents as a big component as the CPI does, so the fact that it is rising is a warning sign,” said Louis Navellier, founder of Navellier & Associates, in emailed comments.
The reading largely confirmed similar data from the consumer-price index, another closely watched inflation barometer, which sent stocks lower earlier this month. Since that report was released just over two weeks ago, the S&P 500 has fallen more than 10%.
Helping to underscore this point, data out of the eurozone showed inflation accelerated at a record pace last month.
See: Eurozone Inflation posts new record high of 10% in September
In other news, investors also heard from Fed Vice Chair Lael Brainard, who reiterated that the central bank would keep interest rates elevated to combat inflation, even if it harms the economy.
See: Fed won’t pull back from rate hikes prematurely, Brainard says
Since it will take time for high interest rates to bring inflation down, Brainard said the Fed is “committed to avoiding pulling back prematurely.”
Investors were also keeping an eye on megacap tech stocks. Apple Inc. AAPL fell 3% on Friday after leading markets lower a day earlier following a downgrade by Bank of America.
Need to know: Here’s why investors should start betting on Apple and the stock market now
A final reading on the University of Michigan consumer-sentiment index for September showed consumers’ view of the economy improved somewhat during the month due to falling gas prices, even as their outlook remained broadly pessimistic.
Investors are now facing “what may be one of the most important earning seasons in a very long time, with a major rally in the cards if earnings don’t disappoint, and if the bears are right, lead to a further leg down if earnings disappoint and 4th quarter estimates are cut,” Navellier said.
See: U.S. consumers remain pessimistic about economy even as inflation fears wane
— Steve Goldstein and Barbara Kollmeyer contributed to this article
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