As we eagerly anticipate the chancellor's Autumn Statement, we focus on US inflation and what the decline in UK GDP means for markets.
US CPI surprises to the downside, stock markets soar
US inflation figures showed a slowing in the rate of price rises, up 7.7% over 12 months to October but below the 8% predicted by analysts and a decline from the 8.2% annual increase seen in September. The rate of increase was the lowest since January and led to hopes that the US central bank, the Federal Reserve (Fed), will not have to continue with such an aggressive rate hiking programme.
On a monthly basis, the headline CPI figure rose 0.4% vs a consensus forecast of 0.6%. Core inflation, which strips out more volatile prices such as energy, and is considered to be a leading indicator for overall inflation, fell by 0.4%, the first decline in seven months. Leading the decline was a fall in used car prices (-2.4%) as supply chains have continued to ease and the fall in discretionary spending hit demand.
Whilst markets expressed relief at the news, there is still upward pressure coming from rising rents, up 0.7% over the month and 7.0% over the year. The services sector also saw increases due to continued tightness in the labour market (+0.5% over the month).
In response to the CPI figures, Patrick Harker, president of the Philadelphia Fed, joined a growing number of Fed officials suggesting that it may be possible to ‘slow the pace of … rate hikes”. Markets now expect another 0.5% increase at the Fed’s next FOMC meeting in December, rather than the 0.75% rises seen in the past four meetings.
UK GDP falls in Q3, likely signalling recession
UK GDP fell by -0.2% in Q3, which, although beating consensus estimates of -0.5%, has led to many economists to conclude that this is the start of a protracted recession.
The period was impacted by an additional bank holiday due to the late Queen’s funeral. However, the decline means that UK GDP is now -0.4% below pre-pandemic levels, whereas US GDP is 4.2% above.
Along with the rest of Europe, the UK has seen a significant inflationary shock from the increase in gas prices. However, the UK’s situation has been exacerbated by a volatile political situation and weakening growth prospects. Markets are eagerly anticipating the new chancellor of the exchequer’s Autumn Statement, which is widely expected to include sweeping spending cuts and tax rises.
Stock markets in the US had their most positive day in two years on Thursday following the release of inflation data. The moves were particularly pronounced in growth stocks, with the tech-heavy NASDAQ rising 7.4% on the day and ending the week up over 8%.
Chinese stocks also rebounded on hopes that zero Covid policies will be eased, following reports that China’s border with Hong Kong will be reopened in early 2023, with further travel restrictions being eased after that. Chinese stocks in Hong Kong posting their best week in over seven years, with the Hang Seng China Enterprises index rising 6% on Friday alone.
The failure of FTX, a crypto currency exchange, saw further losses on cryptocurrencies, with Bitcoin down over 13%. Digital currencies have seen significant declines already this year, having not fufilled their role as an alternative to gold in times of high inflation, but rather showing correlation with equity markets. However, this latest development is linked to a liquidity crunch within the FTX exchange after investors tried to pull billions of dollars’ worth of assets following a high-profile withdrawal from a rival exchange. The moves have uncovered an apparently opaque lending structure within the exchange and will lead to further concerns about lack of regulation and oversight.
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