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LGT Navigator: UK government in disarray

October 20, 2022

British Prime Minister Liz Truss loses another cabinet member, but she refuses to resign. Meanwhile, inflation in the UK remains at a record high and price growth in the eurozone is also accelerating again.


German fears of recession

The rally on the US stock markets lasted only briefly and has already come to an end after two days. The S&P 500 lost on Wednesday -0.7% and the Dow Jones declined -0.3%. The Nasdaq Composite shed -0.9%. Investors are keeping an eye on 10-year US Treasury bond yields, which climbed as high as 4.136% on Wednesday, the highest level since July 2008. 

Asian stock markets mostly post losses on Thursday. In Tokyo, the Nikkei loses -1% and the Hang Seng trades -0.7% weaker in Hong Kong. The Shanghai Composite gains 0.7%. 

Truss refuses to resign

The beleaguered British Prime Minister Liz Truss does not want to step down. The Conservative head of government faced questions from parliamentarians in the House of Commons on Wednesday and came under heavy pressure. Opposition politicians called on her to resign after the tax package she had announced in September triggered fierce market turmoil. “I am a fighter,” Truss said during the questioning. However, a few hours later, home secretary Suella Braverman resigned. She cited a breach of security rules as the reason. Truss has thus already lost her second cabinet member within a few days, after she fired her finance minister Kwasi Kwarteng on Friday. Meanwhile, his successor, Jeremy Hunt, has withdrawn most of the tax cuts. 

The situation on the British bond market has eased somewhat and the yields of thirty-year government securities (gilts) quoted on Wednesday at around 4.35%. This is below the recent highs of over 5%, but still well above the level of mid-September before the government announced the tax package (3.5%). The Bank of England therefore remains cautious. In view of the market turmoil, it already decided at the beginning of October to delay the start of the balance sheet reduction until the end of the month: originally, it had planned to start selling gilts acquired in the course of the quantitative easing program on October 6. Now the BoE is considering postponing the start again. 

British inflation remains at a record high

In the UK, price growth accelerated again in September. Thus, the annual inflation rose to +10.1%, after it stood at +9.9% in the previous month as the statistics office announced on Wednesday. Already in July, inflation rose to 10.1%. These are the highest numbers since the data is recorded in 1997. Especially rising food prices have contributed to the latest increase. The Bank of England has already raised interest rates several times during the year to combat inflation. Currently, key interest rates stand at 2.25%. The next monetary policy meeting will be held on November 3.

Price growth in the eurozone accelerates

Inflation also remains stubbornly high in the euro area. Prices have increased in September compared to a year ago by +9.9%, as reported by the statistics office Eurostat on Wednesday. Thus, the first estimate was revised slightly downward (+10%), but it is still the highest value since the introduction of the euro as book money in 1999. In the previous month, annual inflation was +9.1%. Once again, price growth was driven by energy and food costs, which increased by +40.7% and +12.7%, respectively, year-on-year. If energy and food prices are excluded, core inflation amounts to +4.8%, following +4.3% in August. After a long period of hesitation, the European Central Bank (ECB) has now also raised interest rates in order to curb inflation. The next monetary policy decision will follow on October 27.



Economic Indicators October 20

MEZ Country Indicator Last period
03:15 China PBoC interest rate decision
08:00 GE Producer price index (September, m/m) +7.9%
14:30 US Philly Fed Index (October) -9.9
16:00 US Existing homes sales (September, m/m) -0.4%


Earnings Calender October 20

Country Company Period
CH Schindler Q3
CH Temenos Q3
NL Akzo Nobel Q3
SWE Nordea Q3
US Philip Morris Q3


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