Market Commentary: Wednesday 16th October

You will wake up to three bits of good news. Domestically, inflation is soft: UK CPI was flat m/m and +1.7% y/y in September when it was expected to rise +0.1% m/m and +1.9% y/y. In Hong Kong, the government has decided to reduce liquor duties to 10% from 100% for imports over HK$200. In New Zealand, inflation is also weaker, as overnight the New Zealand CPI came out at -0.2% QoQ versus -0.1% expected, causing the currency to weaken.

On the other side of this equation, Chancellor Rachel Reeves has identified a £40bn funding gap, rather than the £22bn previously reported, ahead of her Budget in two weeks' time.

Ahead of the ECB decision tomorrow, I would like to draw your attention to the EUR. The currency opens at 1.0880, with the 200-day Moving Average at 1.0875. Despite Germany’s ongoing struggles with stagnation, the rise of far-right populism in the region, and France’s budgetary woes, the EUR is the third-best-performing G10 currency year-to-date, after GBP and USD. The decline in Eurozone HICP inflation to 1.8% y/y in September seemed to open the door to an October rate cut from the ECB, though services sector inflation remains elevated at 4%.

Consequently, even though German economic data have been disappointing and budget consolidation in France will almost certainly weigh on the country’s growth outlook, I do not expect the ECB to follow the Fed in considering a 50-bps rate cut in the foreseeable future. Indeed, the results of the ECB bank lending survey support the view that the ECB will continue to tread carefully. While the survey does not derail expectations for an October rate cut, the increase in demand for bank loans, albeit from a weak base, suggests that optimism about lower interest rates is already having a positive impact on confidence.

In other markets, Bitcoin rose 0.7% to $66,942.32, Ether rose 1.4% to $2,609.12, the yield on 10-year Treasuries opens at 4.03%, West Texas Intermediate crude rose 0.4% to $70.88 a barrel, and Spot gold rose 0.2% to $2,667.75 an ounce. Data-wise, it is quiet, but we do have Morgan Stanley earnings to look out for, and then it's over to the ECB tomorrow.

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