Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US inflation data softer than forecast
US CPI data was lower than expected in July, coming in flat for the month and substantially lower for the year at 8.5% vs June’s annual figure of 9.1%. The numbers remain historically high, but the sharp monthly fall in US gasoline prices (c.-7%) and airfares (c.-8%) was more pronounced than predicted, prompting speculation that we may be near peak inflation.
Looking into the data, however, shows a broadening out of price increases. This suggests that inflation will remain higher for longer, despite easing in categories that saw the biggest annual increases, such as energy. The Atlanta Fed breaks down CPI into ‘flexible’ prices and ‘sticky’ prices, which tend to fall slowly. Healthcare and rental costs are two ‘sticky’ examples that continue to rise, and rental costs are likely to experience a further step-increase in September, when rents in the US North-East are re-set.
The cost of labour per unit of goods and services produced by US companies rose by 9.5% over the year to July. Q2’s robust company profits indicate that these price rises are being passed on to consumers, further embedding inflation. Although the US labour market currently appears resilient, resolutely bearish consumer sentiment and near-inversion of the US Treasury yield show that markets put the likelihood of an impending recession at c.75% and rising.
There is growing speculation that the US Federal Reserve (Fed) will not respond to an economic slowdown with immediate interest rate cuts, but delay cutting in order to avoid a repeat of the resurgence of inflation seen in the 1960s and 1970s. More information should follow the Fed’s Jackson Hole Economic Symposium in August.
UK economy contracts in Q2 as the cost of living crisis hits consumers
The UK economy shrank by 0.1% in Q2 after a rise of 0.7% in Q1. The fall was mainly driven by lower consumer and healthcare spending, and June’s extra bank holiday to mark the Queen’s Platinum Jubilee may also have contributed to the decline.
The UK economy is now 0.6% larger than it was before the onset of the pandemic, and GDP might continue to bounce during the current quarter, led by hospitality and tourism. Longer-term, an increase in the energy price cap in October is likely to dampen consumer demand further and push the economy into a recession.
China’s central bank cuts rates as the economy shows signs of a slowdown
In stark contrast to other major central banks, the People’s Bank of China (PBOC) cut interest rates by 0.1% in response to July’s slowdown in economic momentum and credit growth. This is the second time this year that the PBOC has stepped in to stimulate growth, which has faltered due to China’s dynamic zero-COVID policy and fragile housing market.
China’s zero-COVID policy has resulted in rolling lockdowns that have hit consumer demand, but output has been maintained by requiring some workers to live in their factories, ensuring that exports and infrastructure continue to be sources of growth.
China’s property market continues to suffer following a default by its largest construction company, Evergrande, and some borrowers are refusing to pay mortgage repayments on unfinished properties. The fall in annual property sales has steepened from -18% in June to -29% in July, while the decline in annual construction remained unchanged since June at -45%. Top-line credit growth is now slowing as borrowing demand contracts, with private credit growth remaining below levels seen in January.
Market review
It was a positive week in almost every global equity market. The MSCI ACWI rose almost 3%, while the S&P 500 clocked up the largest weekly gain, rising 3.3% but still down 9% for the year to date. China was the only major market to see a decline, albeit marginal, down 0.3% as measured by the MSCI China index.
Bond markets fared less well, with every gilt index ending the week in negative territory. Longer-dated gilts ended the week down 2.2% as measured by the BAML 10+ Year Gilt Index. However, the iShares 7-10 Year Treasury ETF ended the week flat.
Ongoing concerns over energy supplies, particularly in Europe, saw the benchmark for oil, Brent Crude, increase by over 3%.
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