New Eras
13 September 2022
A look at the outlook for inflation, monetary policy, recession and earnings forecasts at the start of autumn.
4 min read
13 Sep 2022
Welcome to our Economic Highlights, bringing you market updates from across the UK, US, Europe and China, as well as the FTSE weekly winners and losers.
Monthly UK GDP and associated data for July released were released on Monday, and didn’t read that well. The 0.2% month-on-month gain was below the expected 0.3%, although did represent a decent bounce from June’s Jubilee-affected fall of -0.6%. Overall output was 0.2% lower than it was in March. Services benefitted from the warm weather, but industrial production lost out to the same factor. There were also signs that high energy-intensive industries struggled to maintain output against a background of elevated input costs. In noting the effects of the Jubilee holiday on output, it will be interesting to see what effect the funeral (which will be a Bank Holiday) and period of mourning for Her Majesty The Queen will have on activity – one assumes negative. And those with longer memories might recall that Princess Diana’s funeral was deemed to be a legitimate excuse for a profit warning back in 1997.
The holiday-shortened week in the US was notable for a weak reading of the S&P Global Services PMI (Purchasing Manager Index), which came in at 43.7 vs an expected 44.2 and 44.1 in July. Unlike the ISM version of the PMI survey, which has been more robust, S&P’s is weighted more towards Service industries. This suggests some bite from higher mortgage rates and still elevated fuel prices (although gasoline has fallen from an average $5 in mid-June to $3.71 today). The Federal Reserve published its estimate for the change in US Household Net Worth during the second quarter, and this fell by $6.1 trillion, or some $28bn more than during the first quarter of 2020 when Covid struck. More encouragingly, this only makes a small dent in the subsequent wealth accumulation of $39.5 trillion to the end of 2021 (it was relatively flat during the first quarter, with higher house prices offsetting weaker equity markets).
The European Central Bank duly delivered a rate increase of 75bps, reflecting the rhetoric of toughness espoused at the recent Jackson Hole symposium. Comments from ECB President Christine Lagarde that rates are far away from those needed to curb inflation encouraged markets to believe that another 75bp increase could be on the cards for the next ECB meeting and signifies that the Bank, having been last to start on policy tightening, is determined to move rapidly. The ECB also updated its forecasts for EU growth and inflation. Since the last report in June, predictions for inflation for calendar 2022 have risen to 8.1% from 6.8%, with the peak annual rate still to come before year end. Those for 2023 have risen by a full 200bps from 3.5% to 5.5% and 2024 estimates are still above the 2% target, though only modestly at 2.3%. Growth expectations have taken a hit, especially for the forthcoming winter period, due to potential energy disruptive effects on output, and so Q4 this year and Q1 next year are likely both to indicate negative GDP. The ECB, perhaps fancifully, is predicting Q1 next year to be flat in terms of GDP, but its annual growth projection for 2023 as a whole is reduced from 2.1% to 0.9%. The more aggressive tone on interest rates prompted a major move upwards in all European bond yields and provided some respite for the euro.
China reported lending and credit data, and it was a mixed bag. Aggregate Financing came in stronger than forecast, growing at 10.5% year-on-year, but new loans undershot expectations. This would suggest that central government has been reasonably successful at exerting some pressure onto municipalities and other centrally controlled entities, but that households are still reticent about increasing their borrowing, which was especially the case for mortgages. There remains no great expectation that anything dramatic will happen on the policy front (including zero-Covid) before the National Party Congress, which will start on 16 October.
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