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What's Happening This Week - November 11
First off, my apologies for missing last week. I finally got taken out by Covid, and have spent the past week or so feeling very sorry for myself. Not the sickest I’ve ever been, but still not a trip to Disney either. But on to the important stuff. Markets have been largely positive of late, as investors digest the mid-term elections in the States and a slew of economic data. Today sees the markets reacting strongly to a better than expected CPI print south of the border, which would indicate that the rate hikes are finally starting to work.
So let’s look at the States. We headed into today’s key CPI release with the market pricing in around a 58bps hike for next month. Headline CPI was expected to moderate for a fourth straight month. After peaking at 9.1% in June we were looking for headline annual prices to ease back to 8.0%, which is a tick above the market. However, in a pleasant surprise, CPI came in at 7.7% for October. All of which means that we’re more likely to see the Fed hike by 50 bps, rather than 75 bps in December. U.S. Initial jobless claims increased to 225,000 versus an estimated 220,000. In other news, the mid-term elections have proceeded largely as predicted, but with the Democrats faring a bit better than expected. The results are still being tallied, but it looks likely that the Republicans will take back the house with a slim majority, but the Senate may be fairly evenly split. There’s at least one runoff to come, so don’t expect the dust to settle on this any time soon.
Over in the Eurozone, the latest European Central Bank bulletin underlines that the bank has made substantial progress in withdrawing monetary policy accommodation. Although the bank expects to raise rates further, they have moved to adopt a meeting-by-meeting approach. The bank remains concerned by the risk of an upward shift in inflation expectations proving to be ingrained. That being said, as we move into 2023 we would expect the bank to increasingly consider the impact of sub-par growth dynamics alongside immediate price pressures. In war news, a major retreat as Russia has ordered troops to withdraw from Ukrainian city of Kherson.
Meanwhile in the United Kingdom, tomorrow witnesses the release of provisional third quarter GDP. We anticipate a quarterly correction of 0.6%, this would mark the worst quarterly performance since first quarter 2021, when the UK was last in lockdown. The primary drag on activity is likely to come from private sector consumption, we anticipate a 0.5% contraction amidst plummeting consumer confidence. We can expect discretionary spending to continue to remain depressed, not least as the prospect of a weakening real estate market, due to the impact of elevated mortgage rates, risks negative wealth effects. In terms of housing market pressures we would note the capitulation of the RICS house price with interest. The latest report from the Royal Institution of Chartered Surveyors witnessed the fastest monthly correction in house price expectations on record, -32.4 points. The series has fallen back into negative territory for the first time since June 2020. The massive revaluation in mortgage rates has amplified the correction in housing affordability metrics. Should nominal prices correct, we would be unsurprised should prices decline by up to 15%, the negative wealth effects will be substantive and will play in the negative UK macro narrative into 2023.
Asian markets closed lower amid growing concerns over an economic slowdown in China, including a lockdown in China’s manufacturing hub Guangzhou, as the Covid-19 outbreak spreads. Although it was dwarfed by the news on U.S. CPI, financial markets had a smaller “risk-on” moment in the past week on talk that the other Great Wall of China, the one that goes up around regions with viral outbreaks as part of a zero-COVID policy, is going to come down. But we’d caution investors about being carried along for the ride if we continue to hear such chatter. For one, this week’s “news” was largely proven false, and whenever one is dealing with a less transparent political system, very few decision makers will really be able to speak with authority. As of now, statements from those more powerful bodies have affirmed that the zero-COVID policy remains in place, at least in broad strokes.
Oil prices extend losses as renewed Covid-19 curbs dampens demand outlook.
As always, please give us a call if you have any questions or if you’d like to book an appointment. Please note that Karen is away next week, but the rest of the team will be on deck to handle anything that comes up.