Today's Markets: Stocks timid against rising Treasury yields, Boris comeback?

Odds-on Boris? The former prime minister has over 50 MPs backing him; Sunak has about 40. As part of an ‘expedited’ process they each need 100 to go to a members vote, if it ever comes to that. ‘They’ probably thought that requiring 100 MPs might make it straightforward to anoint Sunak. If Boris gets in, can he command the Parliamentary party? By the same token, could Sunak? Can anyone? Boris has the original mandate from the voters and ‘Levelling Up’ is an economic strategy designed to increase GDP per capita. This is important: growth for growth’s sake - importing people, mainly cheap labour, to boost headline GDP (the policy of the last 30 years) - benefits very few. 'Levelling Up' sounds like what southern Tory heartlands say to Northern regions to win their support. But it is an economic strategy - or it can be, and it could be once again the way for the Tory party to unite. Forget the ideologues and get on with the pragmatic and the practical.

Markets... not too fussed by it all really as noted yesterday afternoon following a bit of kneejerk response to Liz Truss resigning. Sterling trades around $1.12, gilts are pretty steady. Trussonomics was already dead – political risk premia are certainly still attached to UK assets but not the full-on Moron Risk Premium. Does it matter who the PM is in the end? I doubt it very much matters now – there is not great ideological differences and the experiment with Truss is over. Boris might not be terribly keen on spending cuts but the reality is no Conservative government will ever take on the markets now. The bond vigilantes won. 

Far more interesting now is the monetary policy as it responds to the changing currents of Westminster and tries to tackle inflation; and Bank of England deputy governor for monetary policy Ben Broadbent gave a interesting speech yesterday in which pushed back against notion the MPC would hike all the way to 5 per cent as implied by markets. His speech yesterday was one of the most assertively direct attempts to say the market has overdone it when pricing rate hikes by the Bank. 

“Whether or not that response needs to be as large as the shift in market interest rates, since our last set of forecasts, remains to be seen,” he said. 

The Bank seems to be worried about the hit to growth. “If Bank Rate really were to reach 5.25 per cent, given reasonable policy multipliers, the cumulative impact on GDP of the entire hiking cycle would be just under 5 per cent - of which only around one quarter has already come through,” Broadbent added.

A chart from Broadbent’s speech pack:  

I noted 75 mentions of inflation - but the implication from the speech seems to be that the Bank won’t go as hard as markets think - fiscal restraint allowing a bit more headroom... but is the Bank’s mandate inflation or growth? 

Broadbent underlined that the Bank can do more if the Treasury is on side, noting that if government support mitigates the effect of inflation, “there is more at the margin for monetary policy to do”.  

Not the Bank is turning dovish: “The justification for tighter policy is clear... The MPC is likely to respond relatively promptly to news about fiscal policy.” But it might not need to go as hard as feared three weeks ago. 

Important chart here showing much the market has moved to price hikes and how much the BoE thinks is needed – Broadbent says take this with “a healthy dose of salt” - but the implication here is that if markets believe the message from Broadbent then it means lower market implied terminal rate = less spent servicing government debt = less need for tax rises... but the question is what about inflation? 

Broadbent seems to stick to the transitory idea – that inflation = simple ‘price rises’ which go up for a reason and then stop. “It remains the case that most of the overshoot in headline CPI inflation, relative to target, reflects the direct impact of higher import prices. It also remains likely that much of this is likely to fade as those prices stabilise. This appears already to be happening in areas most affected by the pandemic.” 

He does not seem, from this speech, to subscribe to the idea that inflation isn’t just price hikes but a paradigm, a regime or indeed a process that becomes self-sustaining. I fear that monetary policy cannot tame this self-sustaining inflationary environment and the inflation we have now will result in permanent destruction in living standards. The CBs, each and every one of them, missed their window to rein it all in.

Recession bound: data this morning paints a less-than-rosy picture of the UK economy. Retail sales fell 1.4 per cent in September, down 6.9 per cent year-on-year as consumers tightened belts in the face of rising inflation. No wonder then that consumer confidence is so low, coming in at -47, hovering near a 50-year low. 

Markets

Stock markets in Europe fell in early trade Friday but within recent ranges. US markets dipped for a second day as Treasury yields continued to march higher as robust US labour market data cemented the case for the Fed to keep hiking interest rates. Hawkish commentary from Fed officials has also underpin a bias for yields to follow the path of least resistance higher. Tesla’s miss also weighed as the stock fell 6 per cent or so – hard for the market to rally against that.

Snap (SNAP) fizzles: shares in Snap plunged again after it reported weaker-than-expected revenues in the third quarter. Daily active users rose 19 per cent but revenues were up just 6 per cent and the net loss widened to $400m. Shares plunged 25 per cent after-hours and this will have a read across for others in the social media and digital advertising space - not least because Snap's average revenue per user fell 11 per cent. Pinterest (PINS) shares fell 7 per cent after hours, with Facebook (META) -4 per cent and Alphabet (GOOGL) -2 per cent.

4d chess? There's a theory that Elon Musk is trying to be named a national security threat to get the US to scuttle the Twitter (TWTR) deal. Nuts? Yes but we know Musk doesn’t actually want to buy Twitter and he’s tried many different ways to get out of it. On the Tesla (TSLA) earnings call the other night he sounded resigned (“excited”) to own Twitter. But at the same time he’s been chatting to Putin and tweeting all kinds of ‘crazy’ stuff that kind of sounds quite pro-Russian. And he’s threatened to cut Starlink for Ukraine. Is there a plan? Usually with Musk things are not what they seem on the surface – hence chatter that it’s all a grand plan to sound pro-Russian enough to get the US government to help him out. And he might pull it off. Bloomberg reports officials are in the early stages of considering whether to review Musk’s deals – including Twitter - from a national security perspective. Twitter deal is due to complete next week... Watch this space. 

Neil Wilson is the Chief Market Analyst at markets.com