Treasury Market Commentary –

Monetary policy under pressure, as inflation remains stubborn

A weekly economic update from our Treasury team.

Published

20th October 2023

Category

Macro Commentary

Contrasting economic data for the UK this week, with headline inflation steady at 6.7%, despite hopes of a modest fall, whilst wage growth slowed marginally to 8.1% (including bonuses), which should still bring some initial relief to the cost-of-living pressures.

Inflation is forecast to drop sharply in October driven by lower domestic energy costs, and with tightness in the labour market starting to ease, reinforces the view the Bank of England have likely reached peak interest rates, and will stay on hold until well into 2024. Interest rate cuts are expected in the latter half of next year as the focus switches from fighting inflation to stimulating growth.

The US economy continues to strongly outperform, with better-than-expected retail sales data this week, meaning one further hike from the Fed remains a real possibility with Treasury yields continuing to push new highs. However, aggressive rate cuts are now being priced in to the second half of 2024 on a weakening economic outlook. Elections in the UK and US next year will only add to the uncertainty and challenges facing investors.

The European Central Bank meets next week, with no change expected as they have likely reached peak rates and again forecasters predict aggressive rate cuts later next year.

Rising geopolitical tensions in the Middle East continue to drive a risk-off sentiment, with ongoing fears of an escalation, keeping oil prices elevated and further stoking inflationary pressures.

On the exchanges, dollar strength continues to drive momentum, driven by economic outperformance and safe-haven flows. GBP/USD remains volatile above the critical 1.2000 level, whilst GBP/EUR is trading at 5-month lows below the pivotal 1.1500 level.

GBP/USD – 1-year chart

Graph GBP Currency Last Price 1 year chart

Week Ahead

Date

Release

Last

Expected*

24/10/23

UK Unemployment Rate 3Mths

4.3%

4.3%

24/10/23

UK S&P/CIPS Services PMI

49.3

n/a

24/10/23

UK S&P/CIPS Composite PMI

48.5

n/a

26/10/23

EU ECB Deposit Facility Rate

4.00%

4.00%

*Bloomberg survey / Not available

Foreign Exchange

Currency

Last

Currency

Last

GBP/USD

1.2125

USD/JPY

149.95

GBP/EUR

1.1450

AUD/USD

0.6310

EUR/USD

1.0570

USD/CHF

0.8930

GBP/AED

4.4450

XAU/USD

1957

Equity Indices

Indices

Previous Close

YTD % Change

FTSE 100

7506

+0.74%

S&P

4278

+11.87%

EUROSTOXX

4089

+7.81%

Central Bank Key Deposit Rates

BOE

FED

ECB

5.25%

5.25%

4.00%

UK Benchmark Rates

Swap Mid (SONIA)

 

2-year

+5.28%

5-year

+4.81%


View Arbuthnot Latham’s Private and Commercial deposit rates.

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