11 October 2022
A week of two halves
Inflation and the Federal Reserve have continued to monopolise the headlines – no doubt leaving market commentators wishing for fresh news.
During a week of contrasts, global stocks kicked things off strongly. The first two days saw the MSCI World equity index soar 5.65%, given that markets contemplated whether the central bank’s tightening might slacken off. Hopes were then boosted by the news that US job vacancies dropped by the most in nearly two and a half years, and on Tuesday the S&P 500 registered its biggest single-day rally in two years.
US manufacturing activity seems to be coming to a head, which has further heightened the mood. According to the Institute for Supply Management survey, activity grew at its slowest pace for two and a half years. Manufacturers are grappling with an excess of inventories now that household spending has reverted to services since pandemic-era restrictions have been lifted. The economy faces the problem of excess stock over the next six months.
Optimism dwindled from Wednesday, and US stocks were in full retreat by Friday after data from the US Labor Department established that the economy was still creating jobs at a strong pace, in spite of the fact that there are indications that it may be starting to cool. However, markets dictated that the figures were such that the Federal Reserve could persist with its aggressive interest rate hikes to quash inflation.
As far as markets are currently concerned, bad news is good news – and vice versa – as signs of slowing growth might deter central banks from imposing higher interest rates.
Several Federal Reserve officials made a point of highlighting that the inflation crisis continues to bite and that changing course was not an option. By the close of the week, markets were pricing in a 92% chance of a 75-basis point interest rate rise from next month’s meeting of the Federal Reserve Open Market Committee. Next week’s CPI inflation figures are set to be the driving force behind the Fed’s next move. It would seem that considerable weakness in the economy – and, perhaps, recession – is the price the Fed is willing to pay in order to restore lower inflation.
News in the UK was incessant, yet the priority for markets was events across the Atlantic. Chancellor Kwasi Kwarteng followed his backtracking on plans to cut the additional rate of Income Tax with another turnaround to bring forward the forecasts of the Office for Budget Responsibility and the publication of his debt-cutting plan.
UK government debt prices rose in the wake of his efforts to appease markets, and sterling returned to its level before the government announced its tax-cutting plan. However, the credit ratings agencies were left unconvinced, with Fitch following rival Standard & Poor’s in lowering the rating for UK government debt to negative from stable.
Tesco, the UK’s largest supermarket chain, reported a fall in profits and forewarned that full-year earnings would be at the lower end of guidance – all the while highlighting the reality of the cost-of-living challenge. The supermarket said that people are “watching every penny” and that customers are switching to cheaper own-label products and buying fewer items.
In motoring matters, there was some good news – data released on Wednesday disclosed a 4.6% surge in new car registrations in September. Figures were bolstered by the demand for electric vehicles, yet the Society of Motor Manufacturers and Traders (SMMT) warned that the overall market remained weak, and that robust consumer confidence and economic stability were vital for recovery. SMMT also mention the knock-on effect of continued chip shortages constraining the supply chain and model availability.
Furthermore, the RAC denounced supermarkets for raising their fuel margins and failing to pass on the recent drop in petrol prices. The average price of petrol fell by almost 7p a litre last month, but the motoring group claimed drivers would have benefitted from an additional 10p reduction had major retailers not chosen to increase their margins instead.
Perhaps prices could soon be making an about-turn. On Wednesday, the Opec+ cartel declared a large cut in oil production, in a forceful move to hike crude prices, which seemed to cause conflict between Saudi Arabia and the US. The cut totals around 2% of global consumption, and resulted in a damning response from Washington, which accused Opec+ of “aligning” with Russia and harming the global economy.
European markets suffered due to the US jobs news at the end of week, but concluded the period fractionally higher.
In the eurozone, manufacturing activity shrank once more last month, as the cost-of-living crisis meant that consumers remained wary and surging energy bills limited production. Last week, the European Union agreed to impose mandatory cuts in electricity use, as well as windfall taxes on specific energy firms. A Reuters poll indicated a 60% chance of recession in the bloc within a year.