The euro plummets to new record lows against the US dollar since October 2002, or near the lowest values in 20 years, in the wake of the roundup of negative macro data relating to Europe: the SME indices say that the Europe is already in recession. But sterling and UK-made bonds are also collapsing, following the announcement by the government of a plan to cut taxes at a record pace since the 1980s. The collapse of UK bonds brings two-year yields to a record high since October 2007, and 10-year rates to jump to the highest value since 2010. 10-year rates still suffer the strongest flare since 1998, with a jump of 26 basis points which brings them to 3.759%.
Returning to the euro, the single currency capitulated in today’s session to an intraday low of $ 0.9736 against the dollar. At around 3pm Italian time, the EUR-USD ratio dropped 0.86% to $ 0.9751.
The publication of the PMI indices of the euro area confirms that the economic contraction of the block is intensifying: the PMI services index falls to the lows of 19 months, the manufacturing PMI slips to the lows of 27 months and the Composite PMI touches a 20-month lows .
“A recession is expected in the Eurozone, as companies report a worsening of commercial conditions and an intensification of price pressures linked to the spike in energy costs”, notes S&P Global, according to which it records “the worst economic performance since 2013 , excluding the months of lockdown due to the pandemic ”.
In particular, in September the services PMI index of the euro area (flash estimate) fell to 48.9 points, compared to the expected 49 and the previous 49.8. The manufacturing PMI fell from the previous 49.6 to 48.5 points and expected 48.7, while the composite worsened to 48.2 points from the previous 48.9.
Against the euro, the dollar trend is diametrically opposed, with the Dollar Index jumping to 112.30 points, the highest value since May 2002.
The dollar benefits from the more hawkish view of the Fed, which this week raised rates by 75 basis points for the third time in a row, to a new range of 3% to 3.25%, a record since 2008. Jerome Powell is preparing to raise rates further in his fight against inflation, despite the recession-hard landing risk in the US.
The pound also collapsed after the announcement of the tax cut plan by the new finance minister Kwasi Kwarteng.
Negative indications from the macroeconomic front also arrived in the United Kingdom, with the PMI services index down to 49.2 points from the previous 50.9 points, worse than the expected 50. The manufacturing index slightly improved to 48.5 points compared to the expected 47.5 and the previous 47.3, however remaining in an evident phase of contraction. The composite index fell to 48.4 points from the previous 49.6 and the expected 49.
It should be noted that the threshold of 50 points is, for the Pmi indices, the dividing line between the phase of contraction (values below) and expansion (values above).
The mix of negative data-announcement plan for record tax cuts since the 1980s has triggered sales on the pound: the UK currency is preparing to end the week with the worst loss, against the dollar, in the last two years, having tested a new low from the past 37 years, at $ 1,1051. It currently falls more than 1.5% to $ 1,1077.
Going back to the plan launched in the UK, the tax cut is substantial: the higher rate of income tax of 45% that applies to incomes above £ 150,000 will be abolished. Consequently, the highest rate becomes 40%, while the base rate will be reduced to 19% from next April.
The Treasury has admitted, reports the Guardian, that 660,000 of the highest-earning Brits will benefit from the abolition of the highest rate of 45%, saving an average of £ 10,000 a year.
Kwarteng also said Britain will spend around 60 billion pounds ($ 67 billion) to subsidize gas and electricity bills for the next six months for households and businesses.
The stimulus plan, which includes other measures, will lead the UK Treasury to issue additional gilt government bonds (read additional debt), for the current fiscal year, worth £ 72 billion, in order to finance the massive measures. of fiscal stimuli that have been approved: