Macroeconomics: The Day Ahead for 19 October

Today is a case of a busy schedule of events and a minimalist run of data being unlikely to have much impact, though there are a number of US bellwether companies reporting earnings, including Johnson & Johnson, Kansas City Southern, Netflix and Procter & Gamble. Statistically there is really nothing other than US Housing Starts, while the busy run of central bank speakers has ECB’s Lane and Fed’s Waller as the only ones set to specifically address monetary policy issues, with Hungary’s MNB expected to continue with its salami slice approach to tightening policy, with another 15 bps hike to 1.80%. Government bond supply takes the form of Japan 20-yr and Finnish 10-yr, with the likelihood that the syndicated sale of the UK’s first long-dated (2053) ‘green’ Gilt will also takes place today. Per se the overarching themes of power crises and rising energy prices, China’s property and regulatory woes, along with geopolitical tensions (above all West/NATO vis a vis the SCO/’Dragon Bear’, i.e. China & Russia) and the de nouveau theme of UK political and monetary policymakers seemingly hurtling down the ‘road to perdition’, which may well set alarm bells off across the G7. Leaving aside the chatter around Chancellor Sunak wanting to cut spending and hike taxes (i.e. “austerity”) at a time when the fragilities of the UK economy’s infrastructure are being very harshly exposed (the UK is clearly not unique in this, but in a more acute situation than its G7/EU peers), it is the BoE’s signal of an imminent base rate hike that has put GBP money markets in turmoil. As the attached chart of changes in the GBP OIS curve out to 1 year since the start of the month more than amply demonstrates. This is particularly the case as much of the curve move occurred on Monday, underlining that this is more reactive and flow / VAR driven than expressing a genuine market view on UK rates. But it does introduce a risk premium into UK markets, and the quotes for longer dated UK deposits on the attached UK money markets table hint at a dislocation, given very wide bid/offer spreads, which in turn impacts the pricing of GBP FX forward rates. It has unsurprisingly taken a heavy toll on GBP STIRS futures, above all in historical and implied volatility terms, and the initial question is whether the fall-out from the cascade of position adjustments claims any scalps.

U.S.A. – Sept Housing Starts

Following from a sharper than expected rebound in the NAHB’s Housing Market Index (80 vs. expected 75, Sep 86) that was above all due to a pick-up in buyer traffic, today’s Housing Starts are seen unchanged at a robust 1.615 Mln SAAR, with Building Permits expected to correct to an equally robust 1.680 Mln after jumping to 1.721 Mln in August. The accumulated backlog of Permits is substantial, thanks to supply chain bottlenecks and labour shortages, and will take some time to clear.