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17 Oct 2023 | 5 minutes to read
Oil and bond prices rallied over the week, as concern mounted around the intensifying war between Hamas and the Israeli army. Attacks on Gaza and Israel show no sign of abating, with significant loss of life and no path to resolution visible. In response, oil prices along with safe haven assets, have rallied. The longer the conflict rages, the greater the chance that other countries get involved and take sides. Iran’s position in particular bears significant geopolitical risk.
For a second consecutive month US inflation was stronger than expected. Headline CPI remained at +3.7%, ahead of economists’ expectations of +3.6%, while core inflation slowed to +4.1%, from +4.3%. These figures were primarily driven by higher petrol prices, reflecting stronger oil prices, and strength in housing costs. Core services were also strong. Inflation is expected to continue to ease in coming quarters, as growth is expected to slow at the start of next year. However, higher energy prices increase the likelihood that inflation remains stronger than expected.
Minutes from its September meeting underlined the Federal Open Markets Committee’s data-dependant stance and uncertainty. The record also reiterated the hawkish bias towards tightening, as inflation risks remain skewed to the upside for most committee members. Members also agree that monetary policy should remain “restrictive for some time” until the committee is confident inflation is moving back to target. The FOMC’s own dot plot suggests that one more hike is in store, with limited rate cuts in 2024. However, futures prices indicate cuts early next year, so there is a chance of market turbulence if this is repriced.
Activity in the UK recovered in the month of August, with GDP growing by +0.2%. This follows a -0.6% decline in July, suggesting that growth in the third quarter was, at best, close to 0%. Activity in July was negatively impacted by health and education strikes, as well as wetter than average weather. Fewer strikes took place in August, which boosted growth. This primarily was driven by the services sector, with manufacturing output falling -0.8% and construction down -0.5%. The Royal Institute of Chartered Surveyors’ survey indicated continued weakness in housing demand, with the house price balance slipping further to the weakest level since the Global Financial Crisis. Activity is expected to remain subdued in coming quarters, though real incomes should be under less pressure in coming months, as inflation slows.
Chinese data showed signs of recovery in September. Trade continued to contract, but less dramatically. Exports declined by -6.2% compared to -8.8% in August, while imports declined by -6.3% compared to -7.3%. Manufacturers have been cutting prices to boost sales so the slump in volumes is likely less severe than the drop in export values. Credit growth also shows signs of stabilising, with government bond issuance stronger than expected. The government’s supportive policy response continues, with several local governments issuing special refinancing bonds to sure up finances. The People’s Bank of China also announced further interest rate cuts for existing mortgage loans. However, hopes of a revised budget looks unlikely now. The agenda for the upcoming NPC Standing Committee meeting includes a review of a bill assigning additional local government debt quotas in advance, but gives no mention of a budget review.
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