We often think it's a one-way street, that investors or markets react to policy changes. But markets can push back and drive changes to policy. Two examples of this pushback can be seen in October and there may be more to come in the months ahead. We will cover what changes markets may push for and what it might take to prompt those changes.
In October the markets proved once again that they can drive policy reversals.
- After the new U.K. government's decision in September to propose aggressive fiscal stimulus while inflation is very high, markets responded with a rapid drop in the pound and rise in U.K. government bond yields (the 10-year yield more than doubled from 2.0% in August to 4.5% in late September). The resulting turmoil inflicted on pension plans prompted the Bank of England to intervene in the U.K. government bond market and delay plans to start quantitative tightening (QT). Even more importantly, the market forced Prime Minister Truss to abandon the plans as she resigned after a mere 44 days in office.
Wild market swings prompted U.K. policy change
Source: Charles Schwab, Bloomberg data as of 10/23/2022.
- While electricity and natural gas prices in Germany have come down this fall, after soaring this summer as Russia cut off the Nord Stream gas pipeline, they remain historically high. Last week, in a dramatic reversal of an earlier decision by Economy Minister Habeck, German Chancellor Scholz ordered Germany's remaining three nuclear reactors to remain in operation through the winter in an effort to further ease energy prices.
Last week, China delayed the release of its monthly economic data at close to the last minute, perhaps due to concern about market reaction during the Party Congress meeting of policymakers.