Markets last week
November has been a fantastic month for markets as central banks kicked things off at the start of the month by striking a more dovish tone in their meetings setting the scene for a year end rally. Then the following week inflation prints in Europe, the UK and the US all reported a firm downward trend cementing the positive tone.
After a particularly strong couple of weeks, last week was more tempered. Sterling was particularly strong which meant that although many international equities were mildly positive last week, in GBP terms they were down. Sterling appreciated 1.1% vs. the US dollar and 0.9% against the euro.
Global Equities, as measured by the FTSE All-World Index, finished the week up 1.0% in US dollar terms but fell 0.5% in sterling terms. Month-to-date gains for global equities in US dollar terms are now 8.9% but 4.7% in sterling.
Global bonds, as measured by the Bloomberg Barclays Global Aggregate Index GBP Hedged, finished the week marginally down. Credit markets were more robust finishing flat whereas government bonds were more mixed. Bond yields in the US were stable whereas the UK curve shifted higher in a parallel fashion by 20 basis points. The UK 10-year yield moved from 4.1% to 4.3% during the week giving back about half of the gains made in the last month.
UK Autumn Statement
Although markets were fairly insipid last week there was plenty in the economic data to digest and discuss. The volatility in UK yields perhaps could have been predicted given the Autumn Statement took place on Wednesday in the House of Commons. In his aim of jumpstarting the UK economy without triggering a resurgence of inflation, the Chancellor announced measures that will impact the public with a key focus on National Insurance cuts, pension legislation changes and business-boosting reforms. This was always going to be a challenging balancing act for the government with the General Election looming and given the fact that it is little over a year since we witnessed what happens when financial markets lose confidence in government policy.
There was a slew of economic data during the week, Europe continues as an area of concern. Although eurozone preliminary/flash Purchasing Managers Index (PMI) data was stronger than expected, Manufacturing PMI came in at 43.8, firmly in contraction. The European PMI data is consistent with an economic slowdown but doesn’t imply a particularly deep recession. The UK economy seems to be more resilient based on the same flash PMI measures, surprising to the upside. Although Manufacturing PMI is also in contractionary territory coming in at 46.7 it is stronger than in Europe and has shown a marked improvement from the prior reading. Preliminary services PMI also came in stronger than expected avoiding contraction. In aggregate it seems that the UK private sector is more robust than economists had predicted and implies possible positive Gross Domestic Product (GDP) growth in the fourth quarter. In the US the flash PMI data showed continued resilience for the US economy too maintaining the trend of this year. The final PMI data will be released on Friday next week.
The US labour market data was broadly interpreted as positive after breaking the recent softening trend. Initial jobless claims and continuing claims both fell last week, and the labour market was stronger than economists had forecast. Looking under the bonnet, however, the unforeseen strength can be entirely explained by the seasonality adjustment factor. On a non-seasonally adjusted basis initial claims increased by 21K making for an entirely different story.
The week ahead
Wednesday: US GDP annualised data
Our thoughts: The US economy grew above expectations at 4.9% on an annualised basis in the third quarter according to the preliminary data. The final reading is due on Wednesday. The US economy has been more resilient than economists had predicted, with the labour market strength being a key driver of this resilience.
Thursday: European Consumer Price Index (CPI)
Our thoughts: The preliminary inflation data for the eurozone is expected to show continued easing of price pressure. Core inflation is expected to fall below 4% which month-on-month headline CPI is expected to drop into negative territory.
Thursday: US personal income and spending data
Our thoughts: The cost-of-living crisis is taking its toll on the consumer. Personal spending has been robust in recent months while the volume of goods bought has fallen. While personal spending has been strong, personal income has been under pressure. The vulnerabilities of the consumer are at the forefront of economists and macro analysts discussions considering the recent softening in the labour market and rising delinquencies. The personal income and outlays report will provide an important insight into the state of the US consumer.
Friday: S&P Global/CIPS final PMI data
Our thoughts: Overall November’s preliminary PMI data came in slightly stronger than consensus. Europe seems to be the area of most concern while the UK and the US have been more resilient. The final data on Friday should reflect the flash readings from last week, however with economies carving a fine line between contraction and expansion any revisions in the data can change the narrative.
The numbers for the week