One Swallow Doesn’t Make a Summer!
Last week was a story of a slow build-up of anticipation ahead of Thursday’s US inflation data. Finally, the numbers were released and welcomed by an extraordinarily exuberant response, with the dollar index recording a 4% fall by the close of business. The financial markets reacted as if the Fed had announced that the fight against inflation had been won, and they were immediately going to pivot policy! Hmmm, in reality, we are back at February’s inflation levels, and there are still sets of employment data and another set of inflation numbers to be released before the next meeting of the Fed. There are also stories emerging that the; hey was distorted by changes to medical insurance, hey ho; we will see when the next data is released. Regardless, the derivative markets are now forecasting only a 50bp rise in Fed Funds in December, down from 75bp, which was discussed the previous week. As the old maxim says, “one swallow doesn’t make a summer”, and the Fed will want to see at least next month’s Non-Farm Payroll and Inflation data before even contemplating slowing their rate of interest rate increases.
Sterling had a mega week of gains, possibly reflecting how short of the pound the market was when it went into the US CPI data. Friday’s somewhat disappointing Q3 GDP data, which showed that the UK economy had contracted by 0.2%, was pretty much shrugged off. In fairness, the figures were distorted by the extra bank holiday that the country had in September, marking the Queen’s funeral. However, there are clear signs that the UK is heading for a recession, the only question being how deep it will be. Whether the pound becomes giddy trading at these higher levels is a question to which we suspect only Jeremy Hunt knows the answer. In the next few days, we may get some hints about what the Chancellor’s budget announcements due Thursday afternoon will contain. Expectations are for some fiscal tightening which will lead to households having less disposable income which will dampen inflation, especially if the Government restricts its energy support scheme as expected. The difficulty that both the Chancellor and PM face is tightening whilst keeping the backbenchers onside. At least this time round, we have a relatively benign bond market and the Office for Budget Responsibility will have glanced their beady eyes over the numbers and presumably given them the nod.
Before we get to Jeremy Hunt’s budget statement on Thursday, there is little matter of employment data on Tuesday, followed by the latest UK inflation readings on Wednesday. Whilst there are undoubtedly signs of the looming recession on the high street, tomorrow’s unemployment rate should stay around 3.5% due to ongoing Covid related staff shortages. Economists expect Wednesday’s inflation number to be near its peak, around 10.6%. Hopefully, the economists are telling supermarkets and other retailers their thoughts as it feels to us that prices are still rising! Then on Friday, as we digest how much poorer we are likely to be, the Office for National Statistics releases Retail sales for October, which should make for desultory reading.
The euro, having experienced one of its better weeks last week during which it put in solid gains, particularly against the dollar, is under the economic microscope this week, starting with the bloc’s Industrial Production report scheduled for release just as this hits your inbox. Arguably, more importantly, tomorrow sees third-quarter Employment data and Gross Domestic Product for the same period. Also, on Tuesday, ZEW is scheduled to release its latest economic sentiment surveys for Germany and Europe. On Thursday, prior to the UK’s Budget, the all-important inflation data for the eurozone is scheduled for release, which should set the scene nicely for an exciting afternoon on GBPEUR!
Now that the mid-term elections are out of the way, the US is back to business. However, this week there is a somewhat bare data docket, the highlight probably being tomorrow’s Producer Price Index which is expected to be softer thanks to falling commodity prices. Wednesday’s Retail Sales data could also spark some volatility. The sales number are an early indicator of the impact that the recent interest rises by the Fed are having on the economy. Housing data is also released, which is expected to be gloomy once again after the current mortgage rate rises. After last week’s reaction to the better-than-expected inflation data, there will be plenty of uber-hawkish rhetoric from Fed Speakers. The worry for Fed officials is that the markets get ahead of themselves and start reacting as if the Fed’s tightening is done and dusted, which it most certainly isn’t. With many on Wall Street keen on a “Santa Rally “to boost their Christmas Bonus, the Fed could be for a titanic battle of words as they try and dampen enthusiasm. Finally, we rarely comment on Cryptocurrencies, but after last week’s failure of FTX, there is some danger of contagion in the financial markets, which may make the Fed’s position more challenging and lead to some strength in the dollar as safe havens are sought.