Last week the Bank of England (BoE) meeting was the focal point for financial markets. The decision was announced alongside updated projections for the UK economy and inflation, and there was a press conference to further explain the Bank’s thinking. Firstly, the Monetary Policy Committee voted 7-2 in favour of a 75 basis point hike in the Bank rate, which left it at 3%, the highest rate since 2008. Committee member Dhingra voted for a 50 basis point hike, whilst Tenreyro was even more dovish, arguing for just an additional 25 basis points on interest rates. The economic projection was dire, with the Bank of England indicating that the recession, which was already underway, would last two years, albeit it would shave a little over 2 percent from economic output during that time. Inflation was set to be a little over its 2% target at the two-year time horizon based on interest rates remaining at 3%, signalling that the BoE will hike further in the months to come. How much further is in question though, especially if the UK economic output worsens more than the central bank’s base case.

There was reference to the upcoming fiscal statement by the UK Chancellor, due on 17 November. If that left fiscal policy tighter than expected, then it could further lower the peak that UK interest rates have to rise to. The market reaction to the BoE’s decision and revised forecasts wasn’t positive, with the pound falling in the immediate aftermath of Thursday’s outcome. It rebounded on Friday, as equity markets closed out the week on a positive note, but the questions continue to grow regarding any additional upside for the GBP against the USD.

This week sees only the preliminary Q3 GDP and September monthly activity figures due. Given the unexpected passing of the Queen and the period of mourning thereafter, September is likely to have been a poor month for GDP, with a sizeable drop expected. The Q3 GDP outturn is also expected to be poor, with a contraction of 0.5% q/q expected. The weakness is likely to be broad based, across manufacturing and services, with consumers tightening their belts sharply.

The GBP is set to be tested this week in my view, since the rally at the end of last week against the USD came amidst broad-based US dollar weakness. Can the GBP strengthen independently? I have my doubts for the near term, and perhaps its best chance is for additional weakness in other major economies.

Last week saw the Federal Reserve hike interest rates by a further 75 basis points, taking the upper bound of the targeted rate to 4%. This was the highest level it has reached since the end of 2007 when the rate was 4.25%. The Fed Chairman, Jerome Powell, signalled that the pace of additional tightening was likely to be slower in the future. However, he warned that the end point or terminal rate for the Fed funds was likely higher than previously indicated, with suggestions that US rates could climb to an eventual peak of 5.5%. 

The markets have so far taken this in their stride, with equity markets recovering after a dip post the Fed on Wednesday, albeit that the tech heavy NASDAQ exchange endured another week of sizeable losses, whilst the US dollar closed out the week lower as well.

The move lower in the US dollar was despite the headline data from the US labour market suggesting ongoing robust employment growth. Non-farm payrolls rose a net 261,000 in October, having jumped by a revised 315,000, so on a headline basis all remains well. However, there was a drop in labour force participation rate, a higher rate of underemployment, and a sharper-than-expected rise in the unemployment rate. So perhaps the move in the US dollar wasn’t as surprising after all!

For this week, the markets’ attention will likely be drawn to the releases of October consumer prices, the October monthly Budget statement and the provisional November University of Michigan consumer sentiment figures. However, it will be worthwhile watching for the September consumer credit release also to see whether credit balances continue to build. For the US, the surge in borrowing costs has yet to exert any influence on its economic performance, but it can’t be long before it does, in my view. Politically there will be a lot of focus on the results of Tuesday’s mid-term elections for the House and Senate.

What did we see last week from Euroland? Some surprisingly robust retail sales figures from Germany (but remember this is a values-based series), higher than expected Euroland consumer prices (the headline rate hitting 10.7% year-on-year in the provisional October estimate), and a better-than-expected outturn for Q3 GDP from Euroland also. That was the early part of the week, and the high point in terms of data and survey releases. Thereafter the Euroland manufacturing PMI recorded a downward revision to October in the final reading, plunging it further below 50, and at the end of the week, despite a better-than-expected final October Euroland services PMI, it was German factory orders data for September that dominated the headlines. Orders dropped by 4% month-on-month in September, leaving them almost 11% lower than a year earlier. Moreover, the orders data was worse than just before the COVID pandemic struck.

What is bad for Germany is likely to be bad for the rest of the Euroland economy, as many of the countries bordering Germany have strong trade links with the European powerhouse. So it is likely that the poor performance of the German economy could lead to the likes of the Netherlands, Belgium, Finland, Austria and Italy doing badly, in my view. 

Is this week likely to see any good news released? Maybe, albeit there aren’t that many important releases left, given that the Euroland Sentix investor confidence release is already out and showed that there had been a larger improvement in investor confidence, albeit the index is still at very negative levels. German industrial production also improved in September by more than expected, however the August figures were downwardly revised, so on a net basis things weren’t that much better. New forecasts from the EU Commission are due towards the end of the week, but aren’t expected to offer any solace, in my view. As for the EUR, perhaps it will benefit from weakness in other economies, particularly the US, in my opinion.

Last week, the Reserve Bank of Australia (RBA) was first out of the gate with a 25 basis point hike in the overnight cash rate, taking it to 2.85%. The RBA continued to talk about the need for higher interest rates, in spite of new home loans hitting a two-year low and a drop in house prices. Soon after, the National Bank of Malaysia (BNM) also hiked interest rate 25 basis points, but against a backdrop of strengthening economic data, and a worrying uptrend in the ringgit that could intensify inflation pressures. The Norges Bank met last Thursday and was expected to hike by 50 basis points. However, amidst signs of a cooling Norwegian economy, the Norges Bank chose to only raise interest rates 25 basis points, and was cautious about future hikes also. The Czech central bank also left interest rates on hold at 7% towards the end of week and appeared to indicate another long period where rates would not increase further at the very least.

For this week, the attention is firstly on the National Bank of Poland. They are expected to hike interest rates to 7%, but might leave interest rates at 6.75%, given the weakening economic environment and also how much interest rates have already been hiked by. Attention then switches to Banxico, where Mexican interest rates are expected to rise to 10% from 9.25%, and then the central bank of Peru is expected to hike 25 basis points. There could be some signals from both the Mexican and Peruvian authorities that the pace of future hikes will slow from here, in my view, but of course central banks around the globe continue to watch closely what the Fed are doing.