The numbers for the week – 16 Oct 23

The numbers for the week – 16 Oct 23

Markets last week

Last week was overshadowed by geopolitical events in the Middle East, which led to a further deterioration of already weakening risk sentiment. Investors moved to safe-haven assets and geopolitical risk hedges, which performed well. The US Treasury market was closed on Monday but surged as the market opened on Tuesday morning. The US 10-year yield started the week at 4.80% and finished the week at 4.67%. Government bond prices rise as yields fall. Although government bonds are safe-haven assets, which explains the rally in Treasuries this week, the long-run implications for the government bonds market are more ambiguous; conflict is inflationary and inflation is kryptonite to government bonds.

It was a particularly volatile week for oil markets as West Texas Intermediate (WTI) moved higher when the market initially opened on Monday, rising from US$82.8bbl at the end of last week to US$86.5bbl, but gave back the gains mid-week falling to US$82.9bbl before rising again to finish the week higher at US$87.7bbl. Although the conflict could have significant implications for the global economy (and in particular oil prices), so long as it remains localised, historical analysis suggests that the market implications should remain relatively muted.

Despite a difficult few weeks, equity markets experienced a relatively good week. The S&P 500 finished the week up 1.27%, the UK FTSE All-Share finished up 1.02% and the FTSE All-World Index finished up 1.13%. Amid weak sentiment, Federal Reserve (Fed) officials encouraged speculation that the central bank is unlikely to hike interest rates again in the November meeting. The fall in Treasury yields and the implication that the Fed has now finished hiking bolstered equity markets. More on central bank activity below.

Turning to economic data released during the week, in the US Consumer Prices Index (CPI) inflation came in mildly hotter than expected. Core CPI, which excludes volatile food and energy prices, moderated slightly from 4.3% to 4.1%. Producer Price Index (PPI) inflation for September came in slightly hotter than expected but remains on a downward trajectory, while wage inflation remained high but is also moderating the labour market remains tight relative to the pre-pandemic era but has softened slightly compared to last year.

UK GDP data released last week for August showed a 0.2% month-on-month increase. The services sector drove this growth, expanding by 0.4%, while manufacturing and construction output declined. Despite the August improvement, it’s probable that the economy slightly contracted in Q3. Tighter monetary policy, rising mortgage payments, fiscal constraints due to inflation, and a weakening job market are factors contributing to this economic trend, but the possibility of a serious downturn is unlikely due to falling inflation and strong wage growth.

Following the relaxation of Japan’s Yield Curve Control (YCC) policy earlier this year and the subsequent steepening of the Japanese yield curve, Bank of Japan (BoJ) board member Asahi Noguchi reinforced the message that further adjustments to the YCC policy are unlikely to be rushed. Noguchi pointed to wage growth as a key area of focus for policy makers, stating that real wage growth will need to hit positive territory to be consistent with the BoJ’s inflation target. Although inflation expectations have increased in Japan, he reiterated that they will need to rise further before the negative interest rate and YCC policies can be scrapped.

Policymakers in China are rumoured to be considering raising China’s budget deficit for 2023, by issuing a huge 1 trillion yuan (c.£111bn) in sovereign debt for infrastructure spending. Should this occur, it could push China’s budget deficit to well above the 3% cap set in March. It would also halt China’s preferred method of allowing local governments to fund infrastructure projects, many of which have failed in recent years. This could also imply that China is concerned about stimulating the housing market too much and creating more bad debt problems down the line.

Last week’s eight-day Golden Week workers’ holiday saw a post-pandemic return to travel, especially within China. China’s domestic tourism market recorded 753.4bn yuan in revenue (c. £84bn), more than double from a year earlier and up 1.5% from the 2019 level, the last comparable pre-pandemic year. China’s domestic travel during the eight-day Golden Week holiday surged from a year earlier and exceeded pre-pandemic levels, according to official data.

Finally, the ongoing crisis in the Chinese Real Estate sector continued this week as China’s largest property developer failed to pay a loan and the Wall Street Journal reported that another Chinese Property giant is now on the verge of collapsing, with “a catastrophic effect” on the rest of the sector.

The week ahead

Earnings season is accelerating in both the US and Europe this week.

Monday: EU CPI

Our Thoughts: The recent European Central Bank (ECB) minutes emphasising concerns about the region’s economic fragility make the inflation figures particularly interesting. Hawkish policymakers at the ECB may push for another hike if inflation were to prove sticker than anticipated. Market participants will be watching the inflation data carefully for any indication that further monetary tightening may be necessary.

Tuesday: US Industrial Production

Our Thoughts: The impending US industrial output statistics will be thoroughly examined in light of the worries expressed in the German industrial production report. A significant improvement in these numbers would indicate continued strength in the US manufacturing industry, potentially allaying concerns about global growth. But if it continues the trend of the most recent report on industrial production in the euro area, which showed a decline, it might be a red flag for international markets, affecting investor confidence and currencies.

Tuesday: China GDP

Our Thoughts: The third quarter GDP data for China will be crucial in determining how far the country’s economy has recovered. The global market is anticipated to react to China’s growth performance given China’s importance in the supply chain and as a significant market for many nations, if its GDP growth is below projections, it may raise concerns about the state of the global economy as a whole and carry implications for oil and commodity markets. Chinese Industrial Production data is also available on Wednesday this will be another point of interest for market watchers.

Wednesday: UK CPI and PPI

Our Thoughts: Understanding the dynamics of inflation in a post-Brexit, post-pandemic environment will depend heavily on the forthcoming UK CPI and PPI data. These UK numbers will be closely examined in light of the worries expressed in the ECB minutes over the eurozone’s sluggish economic growth. Inflationary pressures may be a concern if CPI exceeds forecasts, which could affect the Bank of England’s monetary policy and market concerns over stagflation risks. The CPI and PPI data will be crucial gauges for policymakers as the UK attempts to navigate the fine line between weakening economic fundamentals, lagged effects of rate rises and bringing inflation under control.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Move in yields leaves Fed and ECB Minutes feeling outdated

The minutes from the Fed’s last policy meeting which took place on 20 September were released on Wednesday. A lot has changed since the September meeting, with the US 10-year yield rising aggressively in the weeks following the meeting representing a tightening of financial conditions. The key messages from the minutes show that “most participants continued to see upside risks to inflation”, including “the imbalance of aggregate demand and supply persisting longer than expected, as well as risks emanating from global oil markets, the potential for upside shocks to food prices, the effects of a strong housing market on shelter inflation, and the potential for more limited declines in goods prices”.

The ECB’s minutes from their policy meeting in mid-September suggest that additional interest rate increases are unlikely, despite hawkish warnings from some members. The ECB is convinced that underlying inflation has peaked and will decline further, with their models indicating no need for more hikes. The Governing Council is increasingly concerned about an economic slowdown, altering the risk balance for monetary policy. Given these factors, further rate hikes are improbable.

Bank of England’s Chief Economist Huw Pill stated that interest rate decisions are becoming finely balanced, and they may have already implemented enough tightening measures. Despite high inflation, the central bank has seen the impact of 14 consecutive rate hikes and paused its aggressive cycle. While the Monetary Policy Committee remains divided, money markets suggest one more quarter-point hike before the cycle concludes. Pill emphasized the need to bring inflation back to the target of 2% and stated they will do what is necessary to achieve it, indicating a cautious stance on further rate hikes.

BoJ board member Asahi Noguchi reinforced the message that further adjustments to the YCC policy are unlikely to be rushed. Noguchi pointed to wage growth as a key area of focus for policy makers stating that real wage growth will need to hit positive territory to be consistent with the BoJ’s inflation target. Although inflation expectations have increased in Japan, he reiterated that they will need to rise further before the negative interest rate and YCC policies can be scrapped.

United States

“Risks remain to the upside” for US inflation

Inflation: The September CPI report suggests that most Fed officials may not consider interest rates sufficiently restrictive. While there’s positive disinflation progress in the goods sector, services, particularly rent disinflation, remains stagnant. The Israel-Hamas conflict has added to potential inflation risks. Our baseline prediction is for the Fed to maintain current rates throughout the year, but there are notable risks and uncertainties.

Consumer Sentiment: Worries about inflation have dampened consumer sentiment in October, leading to an increase in both short- and long-term inflation expectations. These levels still fall within recent months’ ranges, but the Fed aims for a sustained return to its 2% inflation goal, hoping to see these expectations decrease.

Employment: The September employment report has left the labour market’s condition uncertain. The establishment survey showed higher employment, while the household survey indicated a decline. Job postings surged unexpectedly, yet wage growth slowed. The labour market appears resilient on the surface, driven by decreased labour demand rather than layoffs. Moreover, potential strikes and government shutdowns pose further risks. While strong data raise the risk of a rate hike, our expectation remains for the Fed to keep rates stable through the year.

United Kingdom

Weaker data overall

Consumer: the British Retail Consortium (BRC) sales like-for-like fell to 2.8% year-on-year in September from 4.3%.

Housing: the Royal Institute of Chartered Surveyors (RICS) house price balance was marginally worse at -69% vs. -68%.

Growth: the August GDP was as expected at 0.2% but the previous month was downgraded from -0.5% to -0.6%. August growth was kept down by manufacturing production, -0.8% after the prior month’s -1.2%, and construction output, at -0.5% down from -0.4%. The index of services was stronger, at +0.4% from -0.6%, but the trade balance deteriorated further.


Surprising uptick in inflation expectations

Surveys: the eurozone Sentix investor confidence beat low estimates, at -21.9, down from -21.5.

Inflation: the (ECB eurozone CPI expectations increased from 3.4% to 3.5% for one year and from 2.4% to 2.5% for 3 years.

Industry: eurozone industrial production rose 0.6% in August, up from -1.3% the prior month.


China: The woes of China’s property sector continued this week as China’s largest property developer failed to repay a loan and expects to miss more international debt obligations. If the company does default, this could create a contagion through the financial system of the world’s second-largest economy.

Chinese inflation was still subdued, with the CPI at 0.0%, down from 0.1% and below estimate, whereas the PPI ticked up from -3.0% to -2.5%.

Chinese foreign trade was still negative year-on-year but improved, with exports down -6.2% from -8.8% and imports down -6.2% from -7.3%.

Japan: surveys deteriorated, with the Eco Watchers survey falling below 50, as the current reading dropped from 53.6 to 49.9 and the outlook from 51.4 to 49.4. The PPI fell from 3.3% to 2.0%. Machine tool orders, the global manufacturing bellwether, improved from -17.6% year-on-year to -11.2%. The more domestic core machine orders had another bad month, down -0.5%, but improved year-on-year from -13.0% to -7.7%.

Oil/Commodities/Emerging Markets

Gold recovers on safe-haven rally

After a sharp decline in gold prices in recent weeks, gold recovered sharply this week as safe-haven assets rallied. Gold was up 3.8% in USD terms, rising from US$1861 to US$1933 by the end of the week. Emerging market equities were up 2% on the week; notably South African stocks did particularly well, benefiting from the rise in gold prices.

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