Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
UK economy regained momentum in October but cost inflation reaches record highs
The UK purchasing managers index, which surveys business managers on their outlook, showed that the UK economy regained momentum in October as the composite index rose from 54.0 to 56.8. Any figure above 50 indicates expansionary conditions. Economists had expected a further slowdown in activity to 56.0. Underlying the composite index, there were divergent growth trends between manufacturing and services sectors as manufacturing managers flagged that shortages of staff and lengthy delivery times from suppliers limit the ability to meet robust consumer demand. Finally, higher wages and supply shortages resulted in a rapid increase of input cost inflation in October, with some evidence that this is now being passed through into consumer prices.
This final point is essential in determining the pathway of future monetary policy decisions in the context of higher inflation. Following comments from the Bank of England (BoE) on the need to suppress inflation expectations two weeks ago, Huw Pill, chief economist at the BoE, commented that UK inflation was likely to hit or surpass 5% by early 2022 and the central bank would have a “live” decision to make in November.
US industrial production fell unexpectedly in September as chip shortages continue to damage auto production
Industrial production in the US fell by 1.3% in September, compared to expectations of a marginal expansion. The major reason for the slowdown was the manufacturing output in auto vehicles and parts as the widely document shortage of semiconductors continues to limit construction. Auto vehicles and parts production fell by 7.2% in the month while factory output outside of the auto industry only fell by 0.3%. The lingering effects of Hurricane Ida were also noted as a reason for the lower than expected output.
Global equities continued their rebound last week from the recent low in early October, approaching all-time highs as measured by the MSCI ACWI index. Brazilian equities were the worst performing major stock market during the week following President Jair Bolsonaro’s announcement that he would boost welfare payments ahead of elections next year. Investors are nervous that the planned increase will threaten Brazil’s constitutional cap on public expenditure, leading to increased government debt and damaged economic credibility. The domestic equity market, measured by the MSCI Brazil index, fell nearly 10% over the course of the week.
Another emerging market leader, Turkey’s President Erdogan, communicated over the weekend that ten foreign diplomats would be expelled from the country, following their decision to sign a joint declaration that called for the release of a notable businessman. The decision marks a significant escalation between Turkey and Western economies, including the US and EU. The Turkish Lira has depreciated by roughly 40% since February as a mixture of poor monetary policy decisions and antagonistic foreign policy have led to capital outflows.
Look out for next week’s update, where we’ll be focusing on US GDP data, the Japanese election and European inflation data.
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