- We are in a new world shaped by supply. Major spending shifts and production constraints are driving inflation.
- Constraints are rooted in the pandemic and have been exacerbated by the energy shock and China’s lockdowns.
- We are in a new macro regime where central banks are causing recessions rather than coming to the rescue. That is clear in the rate path of major central banks set to overtighten policy as they battle inflation. We think they will eventually pause but not cut rates when confronted with the damage of sharp rate hikes – that could be the reality of recession or the appearance of financial cracks, as seen in the UK.
- The Federal Reserve … signaled it would have to take rates higher than it originally planned, even if at a slower pace.
- The Bank of England has acknowledged some recession is necessary to get inflation down, yet like other central banks, it is failing to acknowledge the scale of the recession needed to get it all the way down to target.
- The ECB continues to normalize monetary policy, but a change in tone suggests it could be poised to slow the pace of hikes. We think the ECB is still raising rates into a recession triggered by the energy shock and its hikes.
- Investment implication: We are tactically underweight DM equities after having further trimmed risk.
Archives of “Economy” categoryrss
Chinese economic activity data for October 2022. Both sales and output missed expectations.
October retail sales fell y/y. They last fell back in May when Shanghai was locked down. Rolling COVID restrictions and a collapsing property market were negative influences on this data for October. Yesterday I posted on moves from Chinese authorities to address COVID and property woes and boost the economy
Other data released included:
Surveyed Jobless Rate 5.5% y/y
- expected 5.5%, prior 5.5%
Property Investment YTD -8.8% y/y
- expected -8.3%, prior -8.0%
Fixed Assets Ex-Rural +5.8% YTD y/y, also a miss
- expected 5.9%, prior prev 5.9%
The International Monetary Fund has written in a piece prepared for the summit of G20 leaders in Indonesia,
recent high-frequency indicators “confirm that the outlook is gloomier,” particularly in Europe
It said recent purchasing manager indices that gauge manufacturing and services activity signaled weakness in most Group of 20 major economies, with economic activity set to contract while inflation remained stubbornly high
- tightening monetary policy
- triggered by persistently high and broad-based inflation
- weak growth momentum in China
- ongoing supply disruptions and food insecurity caused by Russia’s invasion of Ukraine
Info via Reuters.
This data had a delayed release until after the Communist Party National Congress.
Q3 GDP +3.9% y/y
- expected 3.3%, prior 0.4%
Economic activity data for September was also released, see separate post:
Euro zone factory activity declined again in Sept as energy bills bite -PMI
Actual 48.4 (Forecast 48.5, Previous 48.5)
Manufacturing activity across the euro zone declined further last month as a growing cost of living crisis kept consumers wary while soaring energy bills limited production, a survey showed on Monday.
“The ugly combination of a manufacturing sector in recession and rising inflationary pressures will add further to concerns about the outlook for the euro zone economy,” said Chris Williamson, chief business economist at S&P Global.
The pound may have recovered well after its crash on Monday but the heightened volatility isn’t exactly a good sign for the currency itself, as it is arguably a sign that traders are shouting for more credible policy between the central bank and the government. The dollar is little changed so far today after backing away from its highs in the past two days, with month-end and quarter-end trading also in focus. The swings are likely to continue today so that will make it tricky to interpret things until we get to next week.
All eyes will stay on the bond market as a signal for broader market sentiment but as mentioned above, there might be mixed flows taking place with month-end and quarter-end rebalancing also something to consider. The technicals are your best friend in these sorts of situation, so that will at least help provide some guidance amid the recent bout of volatility ahead of the weekend.
YTD industrial profits in China fall further.
- prior -1.1%
Lockdown impacts not going away. Lockdowns not going away either. Property sector has imploded under its crushing debt load.
Pressure on the yuan will continue. Even the People’s Bank of China is slamming it!
World Bank Group President David Malpass is speaking with US TV, Fox Business.
I’m not sure that saying that the current global economic slowdown may persist well in 2023 is adding too much new to the current pool of knowledge. Energy issues (especially for Europe), global central banks ramping rates higher, China malaise … none of these are fresh issues.