Daily Market Commentary 18th November 2022

The UK announced a further Fiscal Update, or Mini-budget, which was accepted by markets a lot more favourably than the Truss disaster. Chancellor Hunt decided to raise taxes and cut spending by more than GBP50 Billion, to fill the budgetry black hole. This is mainly through taking advantage of inflation and tax bracket creep, while budget cuts are deferred into the future, past the next election. It does not address the massive fiscal deficit and debt, or confront the debilitating energy crises. The Budget office forecasts inflation to fall to 7.3%, in 2023, while GDP will contract by 1.4%. The UK is in a deep recession and this Fiscal Statement confirms that it will be long running. Massive deficit spending must be funded, along with the Bank of England offloading Government debt, to the tune of GBP40 Billion(QT). This Budget does not address the energy crises or the fiscal crises. The GBP fell back to 1.1830, but this was generally accepted by markets, as a stop-gap measure.

The Philly Fed Manufacturing Index fell precipitously, as did the Kansas City Manufacturing Index, while Housing Starts and Building Permits contracted sharply. The Fed’s Bullard endorsed the Fed’s hawkish monetary policy and re-affirmed that rates will continue to rise, in the war on inflation. Markets are hearing the narrative but bond yields show they still dream of a pause/pivot. The US Dollar gained some ground, with the EUR slipping back to 1.0340, while the Yen fell back to 140.20. EU inflation surged to 10.6%, while the ECB talked a big game, but needs to now deliver.

Australian headline Unemployment fell to 3.4%, but markets saw this as a ‘green-light’ for the RBA to attack inflation more aggressively. Japanese Trade numbers were in line with expectation, but Imports are surging, increasing 53.5%. Inflationary pressures are on the rise, in the Land of the Rising Sun and the CPI numbers, released today, are expected to reflect this. The rising reserve pushed the AUD back below 0.6700, while the NZD is struggling to hold 0.6100.