The Bank of England widened its intervention in the debt markets to include inflation-linked bonds Tuesday following a sharp rise in yields the day before. The BoE on Monday expanded the size of its bond-buying program designed to push yields lower to 10B pounds per day until Friday. It said today that 5B pounds of that purchasing power will be allocated to buy index-linked gilts, which are linked to inflation with a benchmark to the Retail Price Index. The surge in yields on Monday was driven by index-linked gilts, with yields on 10-year inflation-linked securities soaring 64 basis points. That was a record move going back to 1992 and more than twice the rise seen in conventional 10-year gilt yields, according to Bloomberg.
Material risk to financial stability: The “beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,” the BoE said in a statement. “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”
The BoE is also grappling with tight labor conditions after a record number of people stopped looking for jobs, driving the unemployment rate down to 3.5% in the three months to August, the lowest since 1974.
Pantheon Macro’s Samuel Tombs said that he expects gilt yields to be lower by year-end, but thinks the Monetary Policy Committee will have to be more cautious with hikes, boosting rates by 75 basis points at the next meeting (the market is currently pricing in 115 bps).
Will U.S. get caught up in QT protests? Longer Treasury yields are moving higher, with the 10-year yield (US10Y) (TBT) (TLT) up 6 basis points to 3.94%. The BoE move has little immediate impact for investors in U.S. securities, but the global markets are sending a signal that there will be adverse consequences as central banks try quantitative tightening. “The bottom line is, after decades of central bank stimulus inflating bubbles and financial leverage to grotesque heights, the markets are still in charge and they just won’t tolerate QT,” SocGen’s Albert Edwards wrote after the first BoE intervention. “I keep citing Mike Tyson’s famous quote, ‘everyone has a plan till they get punched in the face.’ Which reminds me, isn’t the Fed in the process of doubling its QT to $96bn a month? Good luck with that!”. The Fed’s Charles Evans said yesterday he sees QT completed in a few years. For stocks (SPY) (QQQ) (DIA) (IWM), BofA strategist Michael Hartnett said on Friday a risk would struggle to rally in Q4 if central bank “policy panics” fail and U.K. gilt yields “amazingly” rose despite the BoE’s new QE moves. Morgan Stanley’s Mike Wilson said the Fed may indeed have to follow the same path as the BoE with M2 money supply growth in the “danger zone.” “Some may argue that the UK is in a unique situation and so this doesn’t portend other central banks doing the same thing,” Wilson said. “However, this is how it starts. In other words, investors can’t be as adamant that the Fed will choose to or be able to follow through on its guidance.” (31 comments)
Twitter (TWTR) rebounded after three off sessions as momentum seemed to shift toward an actually consummated transaction. The move came alongside a report that two big equity investors are sticking with their commitment to Musk to help fund the $33B portion of the $44B purchase price. The Information says Sequoia Capital plans to keep its funding in place – it’s committed $800M – and crypto exchange Binance is set to stand behind its commitment of $500M.
That reiterated support from two of the biggest equity backers is helping to shore up some concerns about funding that still seem to be dogging the deal. Poll: Do you think Elon Musk will eventually own Twitter? Vote in our poll. (10 comments)
Qualcomm (QCOM), Nvidia (NVDA) and chip equipment makers led semiconductors lower on Monday as the industry deals with new export rules from the U.S. slated to curb the use of advanced chips in Chinese military applications.
On Friday, Nvidia told Seeking Alpha that the new export controls from the U.S. government would not have a “material impact” on its business. (61 comments)
JPMorgan Chase CEO Jamie Dimon said that current economic conditions will likely push the U.S. into a recession in the next six to nine months, amid “very serious” headwinds like inflation, rising interest rates, quantitative tightening and the war in Ukraine.
Speaking to CNBC, the head of JPMorgan also warned that markets could become “disorderly” as volatility increases in the face of a fast-changing economic situation. Looking at near-term circumstances, Dimon said the current economy was still doing well but faced significant headwinds that he thinks have already pushed Europe into a downturn. (47 comments)
Ben Bernanke, the former chairman of the Federal Reserve, said that the U.S. economy, which is showing signs of cooling amid the central bank’s aggressive interest-rate hiking campaign, is “certainly not in anything like the dire straits we were in” during the 2008 Great Financial Crisis.
Still, as pressures from Russia’s war in Ukraine as well as a soaring dollar squeeze economies around the globe, Bernanke, who earlier won the Nobel Prize in Economics for his research on banks and financial crises, noted “there are issues of financial stability in various markets,” he said during a press briefing at the Brookings Institution. (35 comments)
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