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The Axiom IFS Update 11th September 2023


Rishi Sunak has told Chinese premier Li Qiang he has “significant concerns about Chinese interference in the UK’s parliamentary democracy” after the arrest of a British parliamentary researcher on suspicion of spying for Beijing.


Inflation rates are falling – but do policy makers trust in what they’ve done to date or do they keep raising interest rates and hope that they don’t go too far? The ECB make their next decision on Thursday before the Fed and Bank of England go next week. Tipping an economy into a recession by hiking rates too high or keeping them high for too long will not be popular, but neither is a continuation of the cost of living crisis affecting food, energy and housing bills. Meanwhile the G20 meeting concludes in India with a row over how strongly to condemn Russia’s invasion of Ukraine and a plan to significantly increase the lending power of the World Bank by up to $100bn per year.


Wages and unemployment data are coming later in the week and likely to be key for both Bank of England policy makers and the pound. Indeed, falling bank rate expectations over the past fortnight have seen sterling retreat against both the dollar and the euro. That being said, GBP traders will have to make do with news out of Asia to boost sterling to begin the week, with GBPUSD up three tenths so far this morning as the dollar weakens.


Whilst the ECB is due to take centre stage this week, the Fed looks set to keep mum, in more ways than one. Reporting over the weekend suggested that not only would the Fed hold rates this month as widely expected, but would also look to reassess the prospect for further hiking this year. On this point, Wednesday’s CPI data is likely to be key. A print in line with market expectations which see core inflation printing at just 0.2% MoM may confirm that the Fed has already hiked for the final time, though the prospects of this being explicitly confirmed appear slim.


The show is back in town, bringing with it the week’s main event, an ECB policy decision. Having been mostly successful in staying on message through the hiking cycle, and largely taking the summer off, ECB speakers have returned with a vengeance over the past fortnight. Not that they have brought much in the way of clarity with them, with members appearing split on how to vote, as are markets and economists on the outcome. Markets still think that the balance of risks is tilted towards one final hike from the ECB given some signs of inflationary stickiness.


Domestic concerns have helped the yen post gains of more than 1% against the dollar when compared to Friday’s close. In this case it was hawkish statements from BoJ Governor Ueda that added fuel to the fire, saying that “If the BoJ becomes confident prices and wages will keep going up sustainably, ending negative interest rate is amongst the options available”. Traders have naturally interpreted this as a signal that yield curve control could be eased faster than previously anticipated, a move that should if realised add significant support for a yen that has been the single worst performer against the dollar across the G10 FX basket so far in 2023.


The Canadian dollar has been taking a beating the last few weeks, but Friday’s session saw the currency fight back, with the trend continuing once again this morning. Friday’s gain of roughly half a percent was triggered by surprisingly strong jobs numbers. Employment rose in Canada by 40,000 in August, doubling expectations and bouncing back from a negative reading the prior month. Along with a surprise increase in wages, traders began to warm up to the possibility of an October hike from the Bank of Canada, with the money market-implied probability rising from 24% to 30%.


China added to its gold reserves for a 10th straight month, extending a push to bolster its hefty stockpile as it tries to diversify away from the US dollar. Bullion held by the People’s Bank of China rose by 930,000 troy ounces in August, the central bank said on Thursday. That’s equivalent to about 29 tons. Total reserves now sit at 2,165 tons, with around 217 tons added in a run of purchases that began in November. Asia’s biggest economy has been among the most enthusiastic buyers of gold in recent times as it focuses on ways to diversify its monetary reserves.


European stocks opened higher on Monday as investors welcomed data over the weekend that showed deflationary pressures eased in China, stoking hopes that the world’s second-largest economy was stabilising. Europe’s region-wide Stoxx 600 rose 0.8 per cent at the opening bell, lifted by gains in the basic materials sector, which tends to reflect expectations of demand from China. In Paris, the Cac 40 advanced 0.9 per cent and Frankfurt’s Dax was up 0.6 per cent. China’s benchmark CSI 300 index added 0.7 per cent after inflation data showed consumer prices rose 0.1 per cent in August, compared with deflation in July.


Former FTX executive Ryan Salame has pleaded guilty to criminal charges related to the collapse of the cryptocurrency exchange, less than a month before the trial against founder Sam Bankman-Fried is set to begin. At a court hearing in Manhattan on Thursday, Salame, who co-led the exchange’s main Bahamian entity FTX Digital Markets and became a big Republican political donor, admitted to conspiring to make unlawful political contributions and conspiring to operate an unlicensed money transmitting business.


Oil prices eased on Monday as a stronger U.S. dollar and economic concerns in China weighed on the outlook for fuel demand, but extended supply cuts by Saudi Arabia and Russia helped keep Brent above $90 a barrel. Brent crude fell 15 cents, or 0.2%, to $90.50 a barrel by 0644 GMT, while U.S. West Texas Intermediate crude was at $87.08 a barrel, down 43 cents, or 0.5%.




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