Welcome to our weekly macroeconomic round-up, where we spotlight a few of the most significant events of the last week.
UK inflation surprises to the upside
UK headline CPI inflation jumped to 11.1% year-on-year in October, beating both consensus expectations of 10.7% year-on-year and the Bank of England’s forecast peak of “just under 11% in October”.
Notwithstanding the government's price guarantee, the UK Office for National Statistics stated that "households are paying, on average, 88.9% more for their electricity, gas, and other fuels than they were paying a year ago." Most economists estimate that UK headline inflation has now peaked.
US recession still some way off
US headline and “control” retail sales inflation also beat expectations in October. US headline retail sales rose 1.3%, while the more important “control” measure (which excludes autos, gasoline and building materials) rose 0.7, possibly boosted by Amazon’s October Prime Day.
Given the open-handedness of US consumers and robust employment growth, a US recession does not appear imminent - barring any exogenous shocks. However, many economists expect the US economy to slide into recession in the latter part of 2023, as the Fed’s interest rate rises and quantitative tightening finally begin to bite.
An early indicator of this is in the rate-sensitive housing market, where the National Association of Home Builders’ index has declined for 11 consecutive months and is now at its lowest level since April 2020.
Market review – equity rally slows, US dollar sells off and oil drops sharply
The accelerating ascent of equity markets in response to relatively tame US October inflation data was met by pushback from Fed officials, with St. Louis Fed President Bullard’s commenting that a "sufficiently restrictive" Fed policy rate lies in the 5-7% region. This sterner tone, coupled with strong retail sales data, caused the US Treasury curve to flatten significantly and send the 2:10-year slope to its deepest inversion since the early 1980s at circa -71bps.
Money market pricing once again implies a peak in the Fed Funds rate north of 5% (vs 3.8% at the time of writing). Analogously, the US dollar’s recent decline started to reverse over the week and gathered further upward momentum as concern grew over the rising number of Covid cases in China.
US equities were flat to slightly lower over the week, with more rate-sensitive tech stocks underperforming the broader index. On the other hand, European equities were slightly higher, and Asian equities materially higher (e.g. Hang Sang +4% on the week), extending their recent relative outperformance. However, this relative outperformance may be jeopardised by China’s rapid rise in Covid cases and the reintroduction of some lockdown measures.
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