Equity markets remain highly turbulent, apparently there is little consensus on what lies ahead for the global economy. US markets posted modest gains on Wednesday, but already on Thursday there are no signs of optimism left since risk assets decline, SPX futures trade below 3700 points, European markets tank, losing on average 1.5%. Fixed-income markets came under pressure again, with yields rising across all maturities, pointing to a persistently high investor anxiety about inflation and monetary tightening by major central banks. Investors’ flight from both equities and bonds makes the greenback resistant to downside corrections despite the recent extreme rally, the DXY advanced 1% higher on Thursday.

The Bank of England said yesterday that it would resume bond purchases to restore orderly market conditions and contain rising bond yields, which are the basis for other interest rates in the economy. The signal of support reduced the likelihood of irrational movements in UK bonds and induced positive momentum in the global bonds and stock markets. It is worth noting that investors reacted extremely negatively to the new fiscal plan of the British government, fearing that the funding of the fiscal stimulus via increased borrowing will dent the long-term sustainability of public finances and therefore began to massively dump UK bonds. In a little less than two weeks, the 10-year Gilt yield rose 1.4%, but bounced lower on the news of intervention:

Prior to the announcement, the GBPUSD traded near 1.05, the statement of the BoE helped the pair to rebound to 1.09. The market manages to hold gains, however the resistance at 1.10 is unlikely to be broken in the short term.

The November 3 meeting will be a huge challenge for the BoE as rate markets price in a policy tightening of more than 130 bp. To live up to market expectations, the BoE may need to go hard and hike by 150 bp, however considering the risks for the economy, the BoE is likely to sacrifice the Pound and leave the bond market vulnerable to further downside by announcing a less aggressive rate hike. The Bank of England delivered just a 50 bp rate hike at the last meeting, which underscores a lack of ability and economy constraints to conduct aggressive tightening. The risks for the GBPUSD are thus skewed to the downside – market participants may be willing to price in a dovish outcome of the meeting.

Several Fed top managers spoke yesterday about the state of the US economy, the interest rate path, as well as the Treasury market, helping investors to clarify the degree of a possible hawkish bias of the Fed at the last two meetings this year. Rafael Bostic said that the Fed should pursue a moderately restrictive policy and bring the interest rate range to 4.25-4.5% by the end of the year. The Fed official’s baseline forecast is a 75 bp rate hike in November and a 50 bp in December, which is in line with current market expectations. Bostic also said that the US economy is less vulnerable to the impact of the energy crisis and geopolitical tensions and retains a high potential for expansion. In turn, Evans believes that the Fed will finish raising rates in March next year, expecting a terminal target rate range at 4.5-4.75%.

The ECB tries to keep up with the Fed and is also preparing markets for interest rate hikes. Rein, Kazaks and Holtzman, who spoke yesterday, hinted at a 75 bp hike in October and that markets should not expect a rate cut next year.

US home sales fell again, according to the data released on Thursday. Sales dropped monthly by 2% against the forecast of 1.4%. Home sales declined during 9 of the past 10 months, down 28% from their peak in October 2021. The downtrend is likely to continue as the outlook for mortgage rates which is a key variable in home demand is negative due to the Fed’s hawkish stance.