Economic Highlights

As expected, the Bank of England raised the base rate by 0.5% to 2.25%. The biggest market-mover of the week, though, was the new Chancellor’s mini-budget. The government committed itself to a huge fiscal easing, comfortably dwarfing the £97bn (approx.4% of GDP) spent during the pandemic on furlough for employees and equivalent support for the self-employed. This is to be funded by additional government borrowing: for 2022-23 alone, the Debt Management Office is to sell an additional £62.4bn of gilts and £10bn of Treasury bills. We already knew about the latest relief measures for energy consumers, although more detailed numbers revealed a liability of around £60bn over the next six months alone (and this is a two-year commitment). On the tax front we saw a reversal of the proposed rises in Corporation Tax and National Insurance, the abolition of the top marginal rate of 45%, and a cut in the basic rate. There were also measures to boost housing via changes in Stamp Duty. But the lack of funding plans, other than to issue even more government debt, unnerved investors.

Alongside its increase in the Fed Funds rate and publication of the new Dot Plot, the Federal Reserve also revealed new economic projections. For 2022, GDP growth is cut from a range of 1.5-1.9% to 0.1-0.3%. For 2022, from 1.3-2% to 0.5-1.5%. 2024 is now targeted at 1.4-2% (from 1.5-2%), with 2025 introduced at 1.6%-2%. Long-run projections were tickled down from 1.8-2% to 1.7-2%. The Fed now sees unemployment rising from 3.6% today to a range of 4.1-4.5% in 2023. If we take the middle of that range, such a rise has never been achieved without causing a recession. With inflation (Core Personal Consumption Expenditure measure) projected at 4.4-4.6% this year, 3.0-3.4% next year and 2.2-2.5% in 2024, it will take some time to get back to a “normal” 2%, hence the “higher for longer” interest rate projections in the Dot Plot.

The S&P Global Composite PMI for the euro zone fell from 48.9 to 48.2 in September, reaching a new low for this phase of the cycle. Pervasive pessimism was also visible in the latest Consumer Confidence data for the region. This fell to a new low of -28.8, which is the all-time low since the inception of the survey in 1985.

The People’s Bank of China (PBoC) declined to cut rates at its latest meeting, perhaps nervous about putting more downward pressure on its currency. The yuan has now decisively broken below 7 versus the dollar, and is on its way to testing the support level of 7.20% it managed to hold in 2019 and 2020. Interestingly, the PBoC imposed higher reserve requirements on FX forward sales, but this seems more likely to slow the tide rather than to reverse it, which is much the conclusion reached after Japan’s Ministry of Finance intervened to support the yen last week. It is hard to see downward pressure on either currency being alleviated without a policy turn by the Fed.