The past fortnight has seen news headlines dominated by geopolitical concerns following the attack on Israel by Hamas and subsequent retaliation by Israel
The nascent conflict has already taken a terrible toll in terms of casualties, with concerns remaining that others may yet get drawn into this conflict.
We have seen plenty of economic numbers over the past fortnight, with the US reporting employment and inflation numbers, as well as China’s monthly “data dump’’ earlier this week. The US jobs report was much stronger than expected, again highlighting that any cracks in the US labour market remain only very small ones, for now. The US created 336,000 new jobs in September, almost double the number expected. We also saw July and August’s jobs data revised higher. The unemployment rate was unchanged at 3.8%. US inflation was also unchanged, with CPI in September unchanged at 3.7% year on year, with core CPI (which excludes food and energy) up 4.1%. US inflation seems to have found something of a plateau in the short term, reinforcing the narrative from the Federal Reserve that rates need to stay higher, and for longer, to push inflation back down to target. Stronger than expected US retail sales and Industrial Production numbers have also added to expectations the Fed will not be cutting rates any time soon. Indeed, market pricing now puts the probability of another hike above 50%.
In China we saw some positive upside surprises, for a change, with Q3 GDP reported to be at 4.9% year on year, versus expectations of 4.5%. Retail sales and Industrial Production numbers were also stronger than expected. Less encouraging was the data highlighting that China is on the brink of deflation, with CPI at zero year on year, and Producer Price Index data down 2.5% year on year. In the UK, the inflation numbers held steady, with CPI at 6.7%, slightly higher than expected. A month on month drop in food prices, the first in two years, was offset by higher petrol and diesel prices. Food prices are still rising at 12.1% year on year. Wage growth in the UK is now ahead of inflation; data earlier this week showed wages growing 7.8% year on year. The UK August GDP data showed growth of 0.2%, as expected, helped by an absence of strikes. July was revised lower, to -0.6%, meaning that September will need growth of at least 0.2% for the third quarter overall to see flat growth. This morning we have seen poor UK retail sales data, and the biggest month on month drop in consumer confidence since the pandemic impacted data in April 2020. Maybe, finally, higher rates are starting to bite.
The International Monetary Fund (IMF) updated its World Economic Outlook last week, leaving its global growth forecast for 2023 unchanged at 3%. 2024’s growth forecast was trimmed slightly to 2.9%. They IMF also raised its inflation forecast for next year, to 5.8%, urging central banks to keep policy tight even as economic momentum slows. Chief Economist Pierre Olivier Gourinchas said “what’s important is that monetary policy remains in tightening territory… the cost of easing too early is probably higher than the cost of tightening a little more, especially when you have an economy that keep surprising to the upside”. The IMF upgraded its growth expectations for the US for 2023 to 2.1%, given the country’s expansionary fiscal policy, strong business investment and resilient consumption. It expects the UK and Eurozone to grow by 0.5% and 0.7% respectively in 2023, with a small increase in 2024. China’s forecast was cut, however, with growth of 5% this year and 4.2% next year expected with the IMF urging “forceful action” to tackle the property crisis, which they see as the biggest factor in holding back growth. The IMF noted that the legacy of the rate hikes already seen is playing out in credit markets, with “clear signs that tighter credit conditions are increasingly affecting real activity”, but these tighter conditions “do not amount to a credit crunch”.
We talked at length about our relatively cautious view of the world in last week’s webinar, for which the replay can be found here. Heightened geopolitical uncertainty compounds this cautious view, and while history shows financial markets are adept at “looking through” many geopolitical issues, for the moment it is not clear how much of a humanitarian crisis and a broader conflict in the Middle East can be averted.
Have a good weekend,
Kind regards,
Anthony.
