The Final Stretch

World Markets

A tumultuous year for financial markets is entering the final stretch, with the ongoing Russian-Ukraine war, Britain battling a self-inflicted crisis and markets pouring over U.S. jobs data to determine how much of an impact Fed hike are having on the U.S. economy.

GBP: Following some of the most turbulent weeks for the UK and the British pound, newly elected Prime Minister Liz Truss was forced into a humiliating U-turn this morning, reversing plans to cut the highest rate of income tax that helped spark a rebellion in her party and turmoil in financial markets. Truss and finance minister Kwasi Kwarteng announced a new “growth plan” on Sept. 23rd that would cut taxes and regulation, funded by vast government borrowing to snap the economy out of years of stagnant growth. But the plan triggered a crisis of investor confidence in the government, hammering the value of the pound and government bond prices and jolting global markets to such an extent that the Bank of England had to intervene with a £65 billion ($73 billion) programme to shore up the markets. While the removal of the top rate of tax only made up around £2 billion out of a £45 billion pound tax-cutting plan, it was the most eye-catching element of an unfunded fiscal plan. The decision to reverse course is likely to put Truss and Kwarteng under huge pressure, less than four weeks after they came to power. Ultimately, from a market’s perspective, it is a good step in the right direction: although it will take time for markets to buy the message, it should ease some of the pressure off the British pound.

EUR: European stock markets are expected to open in a mixed fashion this morning as investors digest renewed regional energy concerns and political turmoil in the U.K.. The European Union energy ministers announced plans on Friday to introduce windfall profit taxes on energy firms, and EU leaders are set to meet at the end of the week to discuss how to step up support for Ukraine and their joint next steps to tame soaring energy prices. In the meantime, market participants are now expecting the European Central Bank to announce another hefty interest rate rise later this month after data on Friday showed that Eurozone inflation beat forecasts, climbing to a record high of 10% in September. Ultimately, Germany’s €200 billion plan to protect companies and households, which includes a gas price brake and a cut in sales tax for fuel, came as gas and electricity costs jumped, caused largely by a collapse in Russian gas supplies to Europe, and followed the continuously increasing inflation results.

USD: As the dollar consolidates near all-time highs, investors will be looking closely at this Friday’s U.S. jobs report to assess how much impact the Federal Reserve’s rate hikes are having on the economy. Several Fed officials are also due to speak during the week, as markets try to gauge their appetite for another 75-basis point rate hike at the bank’s November meeting. Economists are expecting the U.S. economy to have created 250,000 jobs last month, with the unemployment rate holding steady at 3.7% and wage growth staying elevated. Recent jobs data have indicated that the labour market remains robust despite a series of jumbo-sized rate hikes. In fact, another strong jobs report could underline the case for even more hawkishness from the Fed, potentially roiling markets already hard hit by worries over how high rates may have to rise as the central bank battles the worst inflation in forty years. On the other hand, indications that the labour market is slowing could add to fears that aggressive Fed tightening risks tipping the economy into a recession. In the meantime, U.S. equity markets look set to remain volatile after closing the books on their third straight quarterly decline last Friday. Attention later in the day will be on September data for the U.S. ISM manufacturing index. Nonetheless, it is unlikely to dent optimism around the US economy that has been building up further with positive economic indicators released over the last few weeks.