Your weekly economic update from the team at FXD Capital
US consumer prices rose 6.2% in the 12 months to October 2021, with Wednesday’s figures continuing the year-long trend of spiralling prices and fascinations with used cars. Off the back of the print, USD strengthened to its highest levels against EUR and GBP since July 2020 and December 2020, respectively.
Following the news release, short-term US government debt incurred its biggest selloff since the pandemic. Two-year notes rose 0.09bps to 0.52% and the five-year benchmark hit 1.22%, up 0.14bps. Inflation expectations going into the decision were 5.8%, so the reaction to the overshot naturally caused inevitable turbulence as prices adjusted to the new normal. Even when stripping out food and energy prices, inflation still shows a worryingly large increase.
Like in the UK, the net is tightening for the Federal Reserve to respond to the narrative playing out in front. Futures now price in a rate increase for June 2022, with the market bringing forward the decision by almost six months since the summer. Investors are responding cautiously to new debt issuances, conscious of holding a bag of proverbial on the precipice of a long spiral down, with Wednesday’s $25bn 30-year new issuance only receiving weak auction demand. Despite the machinations in the debt markets, stock markets continue to oscillate upwards, with indices hitting fresh highs last week.
The ECB is the more doveish of the large central banks; President Lagarde recently commented that its expectation is for inflation to fall below 2% by 2023, which may negate the need to change rates at all. Economic growth projects reaching 5% this year, slightly up on forecasts of 4.8%. Like other regions, the EU is feeling impacts from logistical issues, but perhaps also from more nuanced forces, like the geopolitical energy games, which are coming to a head at present. When you consider its reliance on manufacturing, the eurozone has faired particularly well with supply chain issues, but unlike other territories, its more fluid labour market softens inflationary pressure.
Back in the UK, the impact of the BOE’s interest rate decision received some gloomy context from this week’s economic growth figures. GDP rose month-on-month by 0.6% in September, which, while more robust than the forecast of 0.4%, did result in the entire quarter’s output of 1.3% falling short of the 1.5% BOE forecast. As the noise from reopenings lowers to a whimper, the UK economy does look rather exposed right now, hence the paralysis faced by the BOE. Even though rates did not change, it seems like the market is taking things into its own hand: mortgage rates are on the up, and there is a clamour from speculative borrowers to fix on ultra-long deals. Savings rates are slowly creeping up from the floor of 0.5% in easy access, with 0.70% looking like the new norm from now on.
Over in China, fears of a debt crisis mounted further as a junk bonk selloff sent yields to their highest level in a decade. Several large conglomerates, such as Evergrande, have been labouring over missed payments, and confidence in Chinese debt is circling the drain. Debt markets are effectively closed to property firms now, so they are on their own and left to the devices of equity investors propping them up or bowing to the whim of the government. It will be fascinating to see what plays out in China; the property bubble has many parallels to that of the west in 2008; however, its status as a planned economy means that the dominoes will fall (if they even do) in an irregular manner. If it happens, the butterfly effect will be profound, with eclectic global portfolios of football clubs, luxury apartments, and logistics enterprises likely to be affected off the back of capital calls.
In a sliding doors-type moment, one wonders if everything in China that happened this year (the cuffing of technology companies and debt crisis) would have happened if Jack Ma of Alibaba had not been so outwardly critical of the regime? It seems like his late-2020 push for Ant Financial’s IPO and criticism of Chinese regulation caused the lights to turn on and the music to stop. Everything happening now in China seems more like the state flexing its muscles over the kind of chaos you would see in a free market economy during a crisis.
All the best for the week ahead
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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