Economic Highlights

The Autumn Budget was the focus of economic attention last week. However, mortgage data showed a surge in borrowing to £9.5bn in September as buyers rushed to obtain funds ahead of the end of the Stamp Duty holiday on 31 October 2021. It’s possible that activity will also be supported for a bit longer if buyers (and re-mortgagers) want to get ahead of potential interest rate rises. Lloyds’ Business Barometer showed the percentage of respondents planning to raise wages was at an all-time high of 45% (with the caveat that this series only started in 2002, and so only encompasses a relatively low-inflation history).

Personal income and spending data came in exactly as forecasted by the consensus. Perhaps more importantly, the PCE Core Deflator, supposedly the Fed’s favoured measure of reported inflation, was unchanged at +3.6% year-on-year, which was 10 basis points below the consensus forecast. Other notable observations are that the Employment Cost Index ticked up a bit more than expected, with quarterly growth of 1.31% being the highest reading since 2001. The personal savings rate has now dipped back below pre-COVID norms to 7.5%. We also had the University of Michigan’s final index of consumer sentiment, which increased by 0.3 points to 71.7, after declining by 1.4 points in the preliminary reading. The report’s measure of five to 10-year inflation expectations increased by one-tenth to 2.9%.

The ECB continues to cling to the “transitory” inflation narrative more than other central banks, possibly with some justification. The latest inflation data showed a big wedge between headline and core inflation rates. Headline eurozone CPI rose 4.1% year-on-year in October, up from 3.4% in September and ahead of the 3.7% consensus forecast. But the core reading was more subdued at 2.1% (versus an unchanged forecast of 1.9%). There is no doubt that the eurozone has struggled more than other western economies to generate inflation since the financial crisis and the belief remains that there is more spare capacity left to be utilised in Europe than elsewhere.

We had two purchasing manager surveys from China over the weekend, which reached slightly different conclusions about the economy. The NBS survey first reported a decline in both Services and Manufacturing, with the Composite reading slipping from 51.7 to 50.8 and barely in growth territory. The headline Caixin Manufacturing PMI headed the other way, rising to 50.6 in October from 50.0 in September. Both surveys reported weaker output, slower suppliers' delivery, higher new export orders, and broadening inflationary pressures in input costs and output prices.