Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US inflation data suggests price rises may prove persistent
The US consumer price index grew by 5.4% in the 12 months to September, up from 5.3% a month earlier. Expectations were for a flat reading and some moderate easing of inflationary pressures. Stripping out volatile elements of the index, such as energy and food prices, core inflation rose at 4.0%, in line with expectations.
The critical takeaway, however, comes from the data underlying inflation. Much of the discussion on US inflation this year has focussed on its persistence, as higher persistent inflation requires central bank tightening whereas transitory inflation can be looked through as prices will eventually normalise. The latest report indicated that the rising cost of rents is replacing transitory factors, such as used car prices, in becoming the major driver of higher consumer prices. Moreover, the shortage of labour in the US could be seen as putting bargaining power into the hands of employees who will in turn demand higher wages leading to a higher cost of labour and, subsequently, inflation.
China’s growth slowed significantly in the third quarter following power outages and Covid-19 outbreaks
China’s economy grew by just 0.2% in the third quarter of 2021, compared with a quarter earlier. Growth of the last 12 months has slowed from 7.9% at the end of June to 4.9% as at the then end of September suggesting that the recovery has weakened. The slowdown in growth stems from a combination of global developments and Chinese government policies.
Firstly, rising energy prices coupled with newly implemented carbon emission targets led to blackouts for some homes and factories. Meanwhile, the Chinese property sector has faced increasing pressure to rein in debt causing a series of defaults for the most indebted companies, such as Evergrande. The Chinese property sector is estimated to contribute roughly 30% of total GDP, meaning a slowdown in construction activity has wider implications for growth than for other economies. Finally, regional outbreaks of Covid-19 cases have led to the complete shut down of economic activity as the government continues to pursue a ‘Zero-Covid’ strategy.
Bank of England Governor Andrew Bailey commits to curbing higher inflation expectations
Andrew Bailey sent a fresh signal to UK investors on the path of monetary policy when he commented that the central bank “will have to act” to suppress inflation if there is a risk that medium term inflation expectations begin to rise, potentially leading to a self-fulfilling cycle of higher prices and expectations. However, he did note that monetary policy cannot solve supply-side problems, such as the current surge in energy prices. At the moment markets are expecting the BoE to raise interest rates twice by the end of the year, bringing the main policy rate to 0.5% from 0.1% at present. This would make it the first major global central bank to increase interest rates.
Global equity markets (as measured by the MSCI ACWI Index) rose by 2.4% last week as markets continued to recover from their short-term nadir at the start of October. Regionally, there was relatively little dispersion, while growth stocks generally outperformed value stocks reversing the overall trend from the past month. Higher inflation and interest rates tend to lead to a preference for value stocks as investors focus on cash flow generation today rather than prospective cash flows.
The Copper price hit a record high on Friday as surging power prices has threatened supply at a time when stockpiles are already depleted. The rising price of gas and coal is increasing costs for miners and refiners globally, leading to fears that supply might drop over the winter months. The price of Zinc has been similarly affected. Nyrstar, one of the world’s largest producers of Zinc, communicated that it would be cutting production by 50% at its three European smelters.
Look out for next week’s update, where we’ll be focusing on PMI survey data, UK and European inflation data.
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