Record Low in Sterling and Other Financial Market Extremes

September 26, 2022

The British pound plunged overnight to an intra-day and all-time low of $1.0327. That’s down 25% from a 52-week high on October 20, 2021 and below the previous record low of $1.0345 in early 1985. Back then in an all-out fight to avoid the humiliation of sterling dropping below dollar parity, the Bank of England base rate had been lifted from 9.5% in November 1984 to 12% in mid-January 1985 and then 14% two weeks later. This time, by comparison, the central bank interest rate was initially raised 15 basis points last December to 0.25%, then this year by 25 bps each in February, March, May, and June, followed by 50 bps in August and a further 50 basis points to 2.25%. British on-year CPI inflation was 5.0% in January 1985, roughly half its current 9.9% pace. Sterling’s close brush with dollar parity in early 1985 reflected generalized dollar strength, whereas its extreme weakness now is more homegrown and specifically an adverse reaction to Prime Minister Truss’s fiscal plans that threat to send U.K. debt sharply higher.

The dollar is sharply higher today against many other currencies, with gains of 0.9% vis-a-vis the Swiss franc, 0.6% versus the Japanese yen, Canadian dollar and Mexican peso and 0.5% relative to the euro, Australian dollar and New Zealand dollar. The Turkish lira, like sterling, briefly touched a record low overnight.

After setting its new record low in Asia overnight, the pound recovered to $1.0779, which still represents a 0.8% overnight loss and a 7.2% loss so far this month. Meanwhile, the 10-year British gilt yield has shot up 28 basis points today to 4.10%, most since 2010 and up from 2.80% at the end of August.

Big rises in 10-year sovereign debt yields elsewhere today have also occurred in Greece (13 bps), Italy (16 bps), Spain (11 bps), France and the United States (9 bps) and Germany (7 basis points).

The 10-year Japanese JGB yield, in contrast, continues to be constrained by the Bank of Japan’s open-ended pledge to cap such at 0.25% and is up just 1 basis point today. Japan also ended a 24-year intervention hiatus last week. Today both Bank of Japan Governor Kuroda and Finance Minister Suzuki expressed great concern about the yen’s one-sided drop and indicated readiness to intervene further as needed.

In stock market action, share prices today closed down 2.7% in Japan, 2.4% in Taiwan, 3.0% in South Korea, 1.6% in India and Australia, 1.4% in Singapore and 1.2% in China. The British Ftse and Spanish IBEX are down 0.7% and 0.6%. U.S. stock futures are also down 0.6-0.7%, but both the German DAX and Paris Cac are barely changed.

While creating a dampening force against elevated U.S. inflation, the dollar strength — the weighted DXY index set a new 20-year high of 114.53 overnight — is likely to cause larger trade deficits in the future and magnify the slowdown of economic activity. The latest OECD Interim economic forecasts revised projected U.S. growth in 2022 down a full percentage point to 1.5% from its previous forecast released in June and projects U.S. growth of only 0.5% in 2023, which is almost as low as its outlook for the Euroland economy. British GDP is expected to record zero growth next year, and the economies of Japan and China are forecast to expand 1.4% and 4.7%.

Latest quoted prices on WTI oil of $78.35 per barrel and $1650.90 per ounce are 27% and 10% below levels seen just three months ago.

A coalition of very right-wing parties won Italy’s general election yesterday. Polls had suggested such an outcome. This confirmation pretty much ensures that Georgia Meloni will become the countries first woman prime minister. Her coalition is not monolithic in ideology, so considerable uncertainty is associated with exactly what will evolve in the EU’s third largest economy, but there is a worrisome possibility that the unified European front seen heretofore in facing the challenges of Covid and then Russian President Putin’s effort to annex Ukraine could take a huge blow from a new Italian stance on such problems. Merloni also wants to revisit the terms attached to its financial support from the EU.

Today’s most significant data release has been the monthly IFO Institute German business climate survey, whose overall index sank more sharply than expected to a 28-month low of 84.3 in September from 88.6 in August and versus a 2022 high of 98.8 last February and a reading of 99.2 in September 2021. IFO officials warn that activity is deteriorating considerably and that the data suggest Germany is sliding into recession. Retail expectations fell to a record low.

Among other releases today, Japanese composite purchasing managers index moved back above 50 to a 3-month high of 50.9 in September despite a 20-month low in the manufacturing sector.

Czech consumer and business confidence in September dropped to 27- and 18-month lows. The consumer reading of 72.7 was down from 101.3 a year earlier, and business sentiment in the same span fell to 93.6 from 107.

Turkish business confidence fell 2.2 points to a 27-month low of 99.9 in September versus 109.8 in February.

Brazilian consumer confidence recovered further to 89.0 in September from 83.6 in August and 75.5 in May.

Spanish producer price inflation of 41.8% in August was a 2-month high and up from 17.9% a year earlier.

Finnish PPI inflation, which had reached a record high of 33.8% in June, settled back to a 5-month low of 27.0% in August.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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