The Day at a Glance | Sep 23 2022

The Top

*Truss`s economic plan causes markets to collapse in the United Kingdom and triggered risk aversion at a global level.

*PMI confirmed three consecutive months of contraction in Europe`s economic activity.

*Russia prepares annexation referendums for Lugansk, Donetsk, Kherson and Zaporizhia, which represent 15% of Ukraine`s territory; it`s feared the conflict will escalate.

Economic environment

Concern in the United Kingdom. The new Prime Minister`s government – Liz Truss – presented an economic and budgetary plan this morning to stimulate growth. The plan includes the most radical budgetary cut since 1972 and a subsidy package for electricity fees that could cost up to 60 billion pounds in the next 6 months. The measure caused the collapse of sovereign bonds in England as it`s feared that the government`s actions will increase the government`s debt to unsustainable levels, affect its ability to pay off public debt and cause greater inflation, hindering the Central Bank of England`s efforts to control it. The pound dropped 2% with respect to the dollar and set under $1.11 for the first time since 1985. The Minister of Finance, Kwasi Kwarteng, assured that the plan`s goal is to aggressively stimulate growth in the economy to avoid a recession, with a 2.5% target level in the medium term, a level that has not been seen since the 2008 financial crisis. The package could cost up to 161 billion pounds in the next 5 years. Yields of 5-year sovereign bonds in England increased more than 50bp after the news and set at 4.07%, the largest hike since at least 1992. In money markets, the likelihood of seeing a 100bp interest increase on behalf of the Central Bank of England in November has set at 80%. 

Economic contraction deepens in Europe. September`s Timely PMI confirmed a greater contraction in economic activity in the Eurozone: The Composite PMI set at its lowest level in 20 months (48.2). Manufacturing activities (48.5) and services (48.9) accelerated their pace into contractionary territory, pointing towards greater chances of a recession in the region. The data points towards a 0.1% contraction in GDP in the 3Q22 and is the block`s worst performance since 2013 (excluding the pandemic). Surveyed businesses have expressed growing concerns about the outlook and demand keeps decreasing. Prices have once again rebounded after becoming more moderate for some months; although there has been improvement among production chains, energy prices continue increasing and have caused greater deterioration in the inflationary environment. High energy prices are not only affecting consumption and quality of life for Europeans, but have also started to limit production capacity in the manufacturing sector. The ECB`s efforts to contain inflation has turned into a more difficult task.