Daylight emerging between US & UK rates
Macro & Overnight
As the Fed increased rates by the expected 75 bps, risk assets first rallied on a perceived dovish tilt to the FOMC’s policy statement. However, that move reversed swiftly once Chair Powell spoke. Powell highlighted that the terminal rate for Fed funds is likely to have a five handle and insisted that rates remain high until the “job is done”. He maintained that there is a greater risk in not tightening enough, allowing inflation to “become entrenched.” Chair Powell reminded investors that any slower pace of hikes does not mean that an outright pivot is approaching
Simon French of Panmure said: “if you wanted an explicit reference to moderation, then you didn’t get it, and Powell was pretty hawkish at the press conference. [His speech] prepared the ground for 50bp in December if the data supports it but left enough space for 75bp if hot prints spooked them over the next six weeks – an FFR plateau at 5% looks reasonable on the data we currently have.”
The BoE is almost sure to follow suit with a 75bp raise today.
The BoE quietly began its QT programme on Tuesday without any signs of disturbance in the Gilt market. The Bank sold £750mn of short-term government debt as it tries to trim its balance sheet by £80bn over the coming year.
This action gives the UK MPC space to talk down the peak for U.K. interest rates from 4.75% to closer to 4.0%. A clear discount to U.S. rates for next year.
The sharp intraday reversal in U.S. equities was more dramatic than in Treasury yields; the curve flattened as two-year yields moved +7bp higher. The S&P growth index and NASDAQ were both battered again, -3.3%.
In energy, European gas storage levels remain high, with France declaring their stores are full and German stores at 99% capacity. Forecasts remain for Europe to exit the winter with stores at less than 20% full. This means that prices will remain high through 2023 as nations seek to fill them ahead of next winter. Oil prices firmed again, focusing on rolling lockdowns in China and concerns over what happens to the US SPR supply post the mid-term elections.
UK Company News
Harbour Energy, UK’s largest oil and gas producer expects that full-year production to be in the upper half of the previous guided range guidance with lower operating costs. Forecast 2022 free cash flow increased to $2-2.2 billion with net debt of $1.1 billion at period end, and they continue to expect to be debt free in 2023. They also announced a new $100 million buyback programme approved. All this represents a remarkable journey for a business that reversed into Premier Oil two years ago after a decade of buying unwanted “legacy” assets from the oil majors and acquiring Premier mainly for its tax losses.
Howden Joinery, the UK’s largest specialist trade kitchen supplier achieved a record performance in its October peak trading period, as people get the new kitchen in place before Christmas. The Group now expects profit before tax to be marginally ahead of the average of published analyst consensus forecasts.
Aero engine and defence contractor Rolls Royce recorded strong order intake in power systems, with large engine flying hours at 65% of 2019 levels in the four months to the end of October and up 36% year to date. FY22 guidance remains unchanged. The company believes it has worked hard to re-establish investibility status.
NB Prices are as at the previous day’s close.
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