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Market Briefing: UK Political Turmoil Continues, Yen Breaks 150, Dollar Climbs

The British pound is back on the defensive, weakening as political chaos and conflicting monetary policy messages sap demand for sterling-denominated assets. Prime Minister Liz Truss—now in power for all of 44 days—is under pressure to resign after firing one of her most senior ministers, receiving resignations from two more, and threatening others with disciplinary action if they failed to vote on party lines. A number of Ministers of Parliament have submitted no confidence letters, and the chair of the 1922 Committee—which represents the views of party leaders—is reportedly meeting with Truss to discuss ways to move forward.

The Bank of England’s deputy governor for monetary policy said interest rates might not have to rise quite as dramatically as markets expect in order to bring down inflation. Terminal rate expectations slipped and the pound fell after Ben Broadbent warned an audience at Imperial College of a potential 5 percent hit to gross domestic product if the Bank followed through on current market pricing, suggesting that internal models supported a more gradual pace of tightening.

The yen fell through the 150 threshold against the dollar last night, dropping to the lowest levels in more than three decades after the Bank of Japan said it would increase bond buying activity to keep yields under control. The interbank exchange rate ticked a few basis points above the psychologically-important barrier before recovering as traders dodged potential intervention efforts. We aren’t seeing any clear evidence intervention actually occurred, but the authorities still have access to a massive war chest, and have a number of other tools that can be deployed in the event of a disorderly decline in the currency – something that could unfold if the exchange rate were to decisively break the 150 mark.

Jobless claims are seen rising incrementally to 230,000 in the week ended October 15, up from 228,000 in the prior week. The US labour market remains astonishingly strong, even as consumer and business sentiment levels stay depressed.

Existing home sales should drop, aligning with other real estate market numbers in recent weeks. Economists think 4.7 million purchases happened in September, down from 4.8 million in August. Data out yesterday showed overall housing starts down 7.7 percent from a year ago, with single-family dwellings tumbling 18.5 percent as higher interest rates kill affordability and crush homebuilding activity.

The Philadelphia Fed’s Patrick Harker is scheduled to deliver an economic outlook at noon. Harker is known to be relatively hawkish, and is scheduled to become a voting member of the Federal Open Market Committee next year, suggesting that his comments could impact terminal rate expectations at some level.

Markets expect tomorrow’s Canadian retail sales data to show a slight improvement in August as back to school spending—particularly clothing—helped offset declines in autos and gas station receipts. The release will be the last to drop before next week’s Bank of Canada decision, and is unlikely to shift market conviction in a 75-basis point move. Traders and economists expect policymakers to to opt for another jumbo-sized increase after yesterday’s inflation report showed little sign of an easing in core price pressures. We’re not fully convinced—the Bank is undoubtedly watching economic developments with growing apprehension—but the case for more aggressive policy has certainly strengthened.

Karl Schamotta, Chief Market Strategist

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