Updated: Oct 26
BoE officials indicate imminent rate hike. Expectations of a rate hike are rising after two Bank of England officials hinted to expect them “significantly earlier” than what was previously expected. The most hawkish member, Michael Saunders believed investors were correct in bringing forward predictions on rate hikes, with the current forecast being December. Markets are actively pricing a rise to 0.25% by December, from the current record low of 0.1% and to 0.5% by next March. Rates are predicted to reach 1% by the end of 2022, a stark contrast to the previous expectations that rates would not be touched until sometime next summer. Governor Andrew Bailey who is currently neutral, stated he was concerned about “very damaging” inflation if action was not taken.
This sent UK government bond yields to their highest point in over 2 years, reaching 1.21%. UK annual inflation is anticipated to reach 6% early next year from the recent rise in energy prices. Although this is partly transitory, predicted average inflation sits at 3% for the current decade, way above the 2% target. “The BoE is saying we have to be careful inflation expectations don’t fester and become a self-fulfilling prophecy therefore as a policy response we have to nip this in the bud. That’s why you’ve seen the market turn very hawkish,” said RBC Capital Market’s chief European macro strategist, Peter Schaffrik. Although this news should help lift sterling, the burdens of Brexit related supply shortages and negative news flow, overpowers what should be a strong correlation with bond market moves.
Banks reap profits from deal making boom. Goldman Sachs smashed third quarter expectations, with profits up 66% from a record amount of IPOs, private equity purchases and M&A activity. Their net income of $5.4bn was $2bn more than the last third quarter, with 44.6% of fees coming from advisory work on mergers and acquisitions. JPMorgan Chase’s earnings were $3.3bn, up 52% and Morgan Stanley hit $2.9bn, an increase by 67%. Bank of America and Citigroup also reaped the rewards increasing quarterly revenues by 23% and 39% respectfully.
Sharon Yeshaya, Morgan Stanley’s CFO said, “The investment banking side, the lens I have right now is in the fourth quarter and I think that the fourth quarter remains strong with clients active.” Oppenheimer’s, Chris Kotowski believes the surge in investment banking comes from CEOs having “monopoly money to play with,” from the Fed’s $120bn monthly printing. However, “no one is expecting the environment to continue,” he added. David Solomon, Goldman’s CEO believes deal activity slowing down is not a threat to growth but instead believes inflation, US economic policy, the Delta variant of Covid-19 and “complicated” US-China relations, “have the potential to be a headwind to growth.”
Bitcoin ETFs await SEC approval. US listed Bitcoin exchange traded funds have waited for 8 years to win approval by the SEC; however, some will potentially get the green light as early as next week. As the 75-day objection period for the SEC ends, ProShares Bitcoin Strategy ETF is the front runner with a potential approval date this Monday, if regulators do not halt it. The positive news sent Bitcoin soaring past $61,000 on Friday, pushing this month’s rally to over 40% as it closes in on its all-time high of $64,869 earlier this April. On Twitter the CEO of CryptoQuant, Ki Young Ju, outlined how whales have driven this run through buying large amounts of Bitcoin through derivatives.
The US has been overtaken by countries including Germany, Canada and Switzerland, with almost 50 crypto ETFs already up and running, totalling $14bn. This is partly from the chair of the SEC, Gary Gensler, who has been hesitant and describes crypto as “rife with fraud, scams and abuse”. To combat price manipulation and lack of liquidity issues on spot exchanges, the SEC has decided every ETF will be based on Bitcoin futures contracts and not its spot price. As Bitcoin ETFs are on the horizon, it marks a historic moment as its approval and acceptance takes a massive stride in the US.
On Wednesday, the Consumer Price Index for the UK will be announced for the most recent month. With previous inflation reported at 3.2%, well above the 2% target, the Bank of England would be pleased with a reduction in this figure, however this may not be the actual reality. Although market expectation surrounds the 2.9% level, a more likely outcome is to see this figure matched if not surpassed. Until the Bank of England will start taper the bond-buying programme and hike interest rates to pre-pandemic levels, a sustained rise in inflation can be expected. If the announced figure is above expected estimate, this can represent a bullish signal for the UK economy as inflation is growth gauge in the economy.
BEIGE BOOK – Monetary Policy
Also on Wednesday, the Federal Reserve will publish their ‘Beige book’, which is release 8 times per year before the Federal Open Market Committee meetings. This report contains insights into the forecasted economic conditions, key business contracts and market expert’s comments on the current macroeconomic trends. Therefore, it can directly impact the markets, as it provides a clear indication of the FED’s monetary policy positions. Given the most recent data on inflation and performance of the US major indices, it is more likely to be interpreted as a bullish sign for the financial markets.
Economic Calendar 18th October – 22nd October
· Data: China GDP & Industrial Production (YoY)
· Events: BoC’s Lane Speech
· Data: US Building Permits, API Weekly Crude Oil Stocks
· Events: RBA Meeting Minutes, BoE Governor Speech, FOMC Member Speech
· Data: UK CPI (YoY), EU CPI (YoY), Canada Core CPI (MoM), PBoC Interest Rate Decision, PBoC Loan Prime Rate, US Crude Oil Inventories
· Events: FED’S Beige Book.
· Data: US Initial Jobless Claims, Philadelphia FED Manufacturing Index (Oct), US Existing Home Sales
· Events: RBA’s Governor Lowe Speech
· Data: UK Retail Sales (MoM), Germany Manufacturing PMI, Canada Core Retail Sales (MoM), Russia Interest Rate Decision
· Events: FOMC Member Speech (Daly)
Thank you to Cameron Barker and George Fol for your in-depth analysis!