TikTok: US President Trump and his Chinese counterpart Xi are expected to hold a call today

Markets

The Bank of England’s policy meeting won’t exactly go down as one of the more important ones in history. The key message on policy rates remains the same as before: stubborn inflation limits the room for rate cuts from the current 4%. CPI is expected to hit 4% in September and until clearer disinflation signs emerge, the policy rate isn’t going anywhere anytime soon. The annual quantitative tightening target for the period October ’25 through September ’26 was cut to £70bn from £100bn with an overweight in selling short (40%) and medium-term (40%) bonds. That move was broadly expected as well since the BoE doesn’t want to be the one adding even pressure to already vulnerable long-term gilts. Sterling slipped to around EUR/GBP 0.87 and the UK gilt yield curve bear steepened, be it in a move that had little to do with the outcome. We saw similar curve shifts in the US (+1 to 3.4 bps, but masking an intraday 10 bps+ move) and especially in Europe. German rates shot up 8 bps in the 30-yr tenor. The steepening is a bit odd in timing, particularly in the US as the bulk happened following a huge drop in US jobless claims (231k from 264k). Did Wednesday’s first of probably several Fed rate cuts in a labour market environment that’s seemingly not completely derailing trigger fear for renewed inflation momentum? Market-based inflation expectations have been trending higher towards their recent highs in any case the last couple of weeks, diverging from real yields. If it’s indeed the inflation component supporting yields higher it helps explain the decent stock performance (WS +1% in the Nasdaq). The dollar gained for a second day straight, pushing EUR/USD back below the 1.18 big figure. DXY rose to 97.4. The Japanese yen struggled ahead of the Bank of Japan decision (see below) but is in better shape since. USD/JPY trades around 147.47. The pair hasn’t gone anywhere in a tight 146-149 trading range ever since the start of summer.

We’re looking at a pretty calm end of the week if the economic calendar is of any guide, offering a chance to let underlying market dynamics play after a heavy central bank week. UK retail sales are among the final noteworthy data for today. They came in slightly better than expected (0.5% m/m headline, 0.8% core) but leave no marks on GBP. US President Trump and his Chinese counterpart Xi are expected to hold a call today to discuss the fate of TikTok but possible the broader trade topic as well. Fed’s Miran double television appearance is worth watching. Miran dissented on Wednesday by voting for a 50 bps cut instead of the delivered 25 bps.

News and views

The UK GFK consumer confidence index dropped from -17 in Augst to -19 September. All measures of the index were down. UK consumers turned less confident both on their personal financial during the last year (-7 from -4) as well on expectations for their finances for the next 12 months (4 from 5), but both levels were still higher y/y. This also applies for the index or major purchases (-16 from -13, vs -23 last year). Consumers turned less confident on the general economic situation over the past year (-45 from -42) and the next 12 months (-32 from -30). The savings index dropped 8 points (22), to slightly below last year’s level. GFK analyses that ‘there’s an autumnal chill in the air this month’ and that ‘The August 7th decrease in interest rates does not appear to have provided any obvious boost to the financial mood of consumers or drawn attention away from day-to-day cost issues’. GFK fears that with tax rises expected in the November budget, the risk is that confidence inevitably falls.

Japanese August CPI excluding fresh food eased from 3.1% to 2.7%, due to utility subsidies. The core measure additionally excludes energy dropped only slightly from 3.4% to 3.3%, still firmly above the BoJ’s 2% target. The publication came as the BoJ debated its policy decision. The BoJ as expected left its policy rate unchanged at 0.5%, supported by a vote of 7-2, with two members voting for a 25 bps rate hike. The Bank of Japan also announced that it will start to sell ETFs and real estate investment trusts (J-REITs) meeting three principles including that it should avoid inducing destabilizing effects on financial markets. It will sell ETFs to the market at a pace of about 330 bln yen per year and J-REITs at about 5 bln yen per year. The 2-y Japanese yield (0.915%) jumped to the highest level since 2008 as expectations on frontloading a potential further rate hike rose. The yen strengthened from the USD/JPY 148 area to currently trade near 147.5. After opening higher, the Nikkei briefly dropped more than 2% off the intraday top levels after the announcement of ETF selling, but reversed a part soon (-0.4%).

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