21st November 2023
The November comeback
Following a risk-off sentiment in October, world markets are bouncing back this month as investors increased their bets that the major central banks have finally ended their run of interest rate hikes.
This new-found investor confidence was evidenced over the course of last week, which saw several bumps in the road that historically would have raised nerves, but were actually hailed by investors. For example, the much-awaited US consumer prices on Tuesday weren’t much to write home about, with prices increasing at a slower annual rate (3.2%, down from 3.7% a month earlier). But the pressures were milder than predicted – fuelling hopes that we can close the chapter on the country’s fight against inflation. What’s more, world stocks bounced as a drop in petrol prices helped bring US inflation to its lowest rate since July.
A cooling US economy?
On Wednesday, data revealing a decline in US retail sales for the first time in seven months further bolstered expectations that the US Federal Reserve has concluded its interest rate hikes.
That said, the decrease was less than anticipated and followed three consecutive months of substantial gains, adding to the growing signs of a cooling US economy. Additionally, US producer prices experienced their most significant decline in three and a half years. However, there is no sign yet that it’s heading towards recession.
Investor focus is now expected to shift towards speculation about when the Federal Reserve might start to cut rates. Analysts have drawn parallels to the soft landing of the US economy in 1994–95, highlighting that the pause in that period lasted only five months before rates began to decrease. US interest rates have been on hold since July.
China’s retail performance surprises investors
Positive economic news wasn’t unique to the West, with positive news from China boosting markets. Retail sales grew by a better-than-expected 7.6% last month and industrial output also picked up faster than predicted. On the retail side, it was a pleasant surprise following reports of lacklustre sales at the annual Singles Day shopping festival, with China’s top two online retailers – Alibaba and JD.com – opting to withhold their full sales data for a second straight year.
The property sector continues to be a weak spot in both China and the US. Real estate and related sectors account for around a quarter of China’s GDP, and news that investment into the sector fell 9.3% from a year ago added to evidence that property is continuing to drag down the economy. In the US, housing costs (rent, hotel rates and house insurance) have climbed 6.7% over the last 12 months.
UK sentiment see-saws
Positive inflation news was in abundance last week, with the UK reporting that its October inflation plunged to its lowest rate in two years. Consumer prices rose at an annual rate of 4.6%, down from 6.7% the month before.
Hetal Mehta, Head of Economic Research at St. James’s Place, commented:
“While the inflation drop to below 5% will be hailed as a major milestone in progress towards the Bank of England’s 2% target, the UK remains one of the highest inflation economies. Core inflation is still stubbornly sticky at 5.7%. The next phase of inflation reduction will almost certainly be more painful for the economy, as the easy wins on energy are now largely behind us.
“While interest rate increases may have subsided, the pass-through of the interest rate hikes to date should keep investors cautious about the UK outlook.”
Despite the good news on inflation, the end of the week brought further evidence of the UK’s economic challenges. Official figures showed retail sales in October slumped to their lowest level since the lockdowns of February 2021. The Office for National Statistics said consumers were continuing to prioritise essential spending and emphasised the impact of the poor weather discouraging would-be spenders from leaving the house.
The government’s latest plans for kick-starting the UK economy will be revealed in this week’s Autumn Statement.
Eurozone interest cut is on ice
Inflation in Italy and France fell back to annual rates of 1.8% and 4.5% respectively. Despite this, the eurozone grappled with the headwinds created by high inflation and record interest rates, leading to a marginal contraction in the third quarter, hinting at a potential technical recession if the final quarter turns out equally weak. Surprisingly, employment bucked the trend, rising amid economic weakening.
Despite the likelihood of recession, a Reuters poll of economists predicted that the European Central Bank’s first interest rate cut won’t come until July next year.
The benign inflation readings in the US and across Europe pushed world stocks to a two-month high. The MSCI World Index and S&P500 have climbed more than 7% so far in November.