Key takeaways from China’s National Party Congress

On the latest edition of Market Week in Review, Director of Investment Strategies, Shailesh Kshatriya, discussed the ongoing political and market turmoil in the UK, including the 20 October resignation of Prime Minister Liz Truss. He also unpacked key takeaways from China’s National Party Congress meeting, which began 16 October, and reviewed the latest inflation data from the UK and Canada.

UK bond market upheaval leads to Truss’ resignation

Kshatriya kicked off the episode with a look at the ongoing turmoil in the UK, which began last month when former Finance Minister Kwasi Kwarteng unveiled a mini-budget that contained a slew of unfunded tax cuts. The announcement of the spending plan sparked a massive selloff in long-dated UK government bonds, known as gilts, he said, with yields on the 10-year UK note surging to 4.6% at one point.


The historic volatility in the gilt market ultimately led to the dismissal of Kwarteng on 14 October by Prime Minister Liz Truss, Kshatriya noted. "The market effectively revolted against the policies Kwarteng set forth within the mini-budget," he stated, adding that Jeremy Hunt - the finance minister appointed by Truss to replace Kwarteng - quickly reversed almost all of the previously announced unfunded tax cuts upon taking office.


While the policy reversal had the desired effect of restoring more order to the UK bond market - the yield on the 10-year gilt dropped below 4% the day Hunt announced most of the unfunded tax cuts would be scrapped - the damage to Truss’ reputation proved insurmountable, Kshatriya said. On 20 October, after less than two months on the job, the prime minister announced her resignation, making Truss the shortest-serving prime minister in the history of the UK, he stated.


"The drama in the UK isn’t over yet, as another round of elections looms for members of the Conservative Party, who now have to decide who should replace Truss as prime minister," Kshatriya noted. He added that Truss will continue serving as prime minister until her successor is named - a decision which is likely to occur within the next week.

Unpacking the main points from China’s National Party Congress

Switching to China, Kshatriya said that the country’s National Party Congress - an influential gathering of party leaders that occurs every five years - kicked off 16 October with a two-hour speech from President Xi Jinping. "This event is receiving plenty of attention, as it’s widely expected that Xi will be appointed leader of the Communist Party for an unprecedented third term during the meeting," he stated.


So, what did Xi talk about in his speech? The Chinese leader’s address spanned a wide range of topics, Kshatriya noted, from the nation’s zero-COVID policy to its growth objectives. Regarding China’s zero-COVID strategy, Xi touted its success in containing the virus and signalled that a relaxation of the policy isn’t imminent, he said.


"This policy is a challenge for the Chinese economy, since households are living under ongoing fears of mini-COVID-19 outbreaks and localised lockdowns, which, in turn, constrain economic activity. Moreover, policymakers have only provided limited stimulus to keep the economy chugging along - but not enough to boost it substantially," Kshatriya remarked. In addition, hopes that a more substantive stimulus package may be forthcoming appear less likely now, he said, based on media reports that President Xi may replace outgoing premier Li Keqiang with Li Qiang. "Premier Li Keqiang has been vocal in advocating for more stimulus than the current band-aid approach. Replacing him with a person more loyal to Xi, such as Li Qiang, potentially reduces the likelihood of substantive stimulus," Kshatriya explained.


That said, Kshatriya noted that in Xi’s recent speech, he re-emphasised economic development as a top priority for China, with the intent to raise the nation’s standard of living to a level equivalent to a moderately developed country by 2035. In particular, the Chinese president emphasised high-quality growth with a focus on homegrown technological advancement, Kshatriya said.


He concluded by noting that one of the main takeaways from the meeting so far is that investors looking for signals that China may ease its zero-COVID restrictions and unleash more significant economic stimulus might be disappointed.


UK inflation tops 10%. How high could the Bank of England hike rates?

Kshatriya wrapped up the segment with a look at the latest inflation data from key developed markets, including the UK and Canada. In the UK, inflation hit a 40-year high during September as consumer prices rose by 10.1% on a year-over-year basis, he said, exceeding August’s rate of 9.9%.

"Rising food prices played a large role in the increase, and this combination of overheating inflation and the drama caused by the mini-budget have markets anticipating that the Bank of England (BoE) will raise rates above 5%," Kshatriya stated. However, BoE deputy governor Ben Broadbent tried to talk down this extreme market view in recent comments, he noted, signalling that the market might be too aggressive in its pricing. 

Meanwhile, in Canada, the inflation story was a bit different, Kshatriya noted, with September headline inflation ticking down to a rate of 6.9% - versus 7.0% in August. This marked the third straight month of decelerating headline inflation, he said, and was mainly due to lower energy prices. In contrast, core inflation - which excludes the volatile food and energy sectors - remained steady at 5.9%, Kshatriya noted.

"Ultimately, while Canada’s inflation situation is more comforting than the UK’s, investors generally still interpreted the September inflation numbers as too strong. This has led markets to expect either a 50-basis-point (bps) or 75-bps rate hike at the upcoming Bank of Canada meeting - whereas before the report came out, markets were leaning toward a 50-bps increase," he concluded.