Warnings of greater risk from UN Secretary-General on the back of the Russian invasion of Ukraine, ease of inflation for the UK, and today's Fed interest rate decision.
Yesterday, the United Nations Secretary General reaffirmed how the Russian invasion of Ukraine stands in violation of the UN Charter and international law, while their campaign has “unleashed a nexus of horror”. In an emotive address to the United Nations General Assembly, António Guterres also expressed concern that “our world is becoming unhinged” as he asserted how nuclear threats and ignoring global treaties and conventions was putting the world and its people at greater risk. Highlighting the protracted conflict in Ukraine, Guterres continued by stating that the breakdown in diplomacy and heightened geopolitical tensions was bringing the international community closer to a “Great Fracture” in financial, economic and trade relations.
On 12 October 2022, the UN overwhelmingly passed Resolution ES-11/1 which demanded Russia to withdraw its troops from Ukraine. While this vote saw 143 support the motion, and just five states (namely, Belarus, Eritrea, North Korea, Russia, Syria) oppose it, a considerable 35 states abstained. Most notable amongst the abstentions was China and India whose wider geopolitical considerations mean that they are keen to avoid confrontation with Russia. Both Beijing and New Delhi respectively support important trading relationships with Moscow, lot least in relation to oil, gas, foodstuffs, military equipment and finance. Moreover, given that China and Russia each look to counterbalance US hegemony, the two often see their geopolitical interests as mutually inclusive.
Notwithstanding the CCP’s desire to maintain a cordial relationship with Moscow, their position over the conflict in Ukraine is also contingent on their individual interests within Ukraine itself. Chiefly, Ukraine is an important destination on China’s belt and road initiative, with the flow of goods transiting from Asia through Ukraine and onto Russia and Europe. Many Chinese firms also rely on imports of soft and hard commodities from Ukraine, particularly wheat and iron ore. As such, China has progressively appeared to push for a peaceful resolution to be found, though has stopped short of indicting Russia.
The self-interested nature of UN member states means that the organisation’s ability to deliver a peaceful resolution is Ukraine ultimately remains subject to wider geopolitical complexities. While Biden made it clear that states should not allow Russia to “brutalize” Ukraine without the fear of consequence, the current state of affairs seems to suggest that diplomatic progress will be slow.
UK inflation came in softer-than-expected this morning as headline CPI eased to 6.7%, marking its lowest level in 18 months. Notwithstanding higher petrol costs, consumer prices eased as inflation on food and accommodation services slipped. Here, the food price index fell from 13.6% from July’s 14.8% figure, a welcome sign for millions of households which continue to grapple with rising food bills.
Core inflation, which excludes the volatile food and energy items also dropped, coming in at 6.2%, some 60bps below expectation and a sizeable retreat from last month’s print of 6.8%. Core inflation in the UK is now lower than in Germany, Belgium and the Netherland’s though remains well above others including France, Italy and Spain. Indeed, when put against the EU’s 12 largest economies, the UK ranks firmly in the middle. Hence, despite core inflation remaining well above the BoE target 2% level, its fall will no doubt be a welcome sign for policy makers, particularly given how it is regarded to be ‘sticky’.
With inflation figures being brought sharply into focus ahead of the Bank of England’s monetary policy meeting tomorrow, markets have downwardly revised their rate expectations. Money markets are now pricing in just over a 50% chance that Threadneedle Street will raise rates 25bps to bring their benchmark policy rate to 5.5%. Given that yesterday money markets were pricing in around an 80% chance of the same outcome, sterling has come under pressure as markets weaken their conviction of the MPC conducting their 15th consecutive hike.
Looking ahead today, all eyes will be on the Fed’s interest rate decision and dot plot release at 1900. Here, the dot plot is expected to give markets some direction, given how it details policy makers’ future interest rate projections. While markets have not priced in a rate hike, hawkish rhetoric, an uptick in inflation and resilient growth give the central bank cause to hold rates for longer than previously expected.
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