Economic Highlights

Headline consumer price increases in September matched July’s cycle peak of 10.1%, with the core reading making a new high of 6.5%. Food and energy are very much to blame, and the squeeze on household budgets is reflected in rising wage demands and threats of strikes. Core Retail Sales (-6.2% year-on-year) are also a sign of stress. The latest S&P Global/CIPS  Purchasing Manager survey emphasises the weakness, with both Manufacturing (45.8) and Services (47.5) falling to new cycle lows in October. The new Prime Minister will have a huge job on their hands to steady the ship, especially with the country’s fiscal deficit ballooning to £20bn in September.

Much attention is being paid to the housing market in the US now that the 30-year mortgage rate tops 7%. This is the highest it has been in more than two decades, and pretty much shuts down the refinancing market in which homeowners took advantage of rising prices and falling rates to extract cash from their primary asset. It will also have an effect on transactions, and we are seeing a slowdown. Last week the National Association of Home Builders index of sentiment fell to a new cycle low of 38. As with Purchasing Manager Surveys, a reading below 50 indicates contraction. Mortgage Applications, Housing Starts and Existing Home Sales all continue to weaken. Although house prices remain strongly up year-on-year, they are falling on a month-on-month basis, and more anecdotal evidence suggests some quite sharp reductions from peak prices in frothy cities. The S&P US Homebuilders Index is down 37% so far in 2022, sharply underperforming the wider S&P 500 (-21%).

The latest consumer confidence reading across the eurozone suggests still weak sentiment despite a slight uptick from September’s record low (-27.6 vs -28.8). Inflation (notably energy) and rising interest rates are the key factors driving sentiment. There is some help from the EU leaders’ imposition of a gas price cap, and at least gas inventories for this winter look healthy (helped by recent mild weather). One-month forward gas prices have fallen from a peak of more than €300 per Megawatt hour to around €100 now, although the trading range pre-Covid was €10-30. The latest S&P Global PMI surveys remain downbeat, with Manufacturing falling to a new post-Covid low of 46.6. With Services at 48.2, a recession appears pretty much inevitable.

To mark the end of the National Party Congress and, perhaps, a return to business as usual, the Q3 GDP data was finally released along with the usual welter of monthly stats. Although GDP beat expectations, coming in at +3.9% year-on-year vs +3.3% expected, the details were not so well received, notably a miss for both retail sales and property investment, as well as a tick up in unemployment from 5.3% to 5.5% when it was expected to fall.