Your weekly economic update from the team at FXD Capital
Consumer confidence is quite an ambiguous indicator; it’s one of those monthly scheduled data points released, interpreted and then quickly discarded. Behind the scenes, confidence data is collected via a survey by GfK, polling consumers on various factors, with the final collated figure intended to indicate the overall sentiment about personal finances and broader economic prospects. It’s quite a tough draw to distil the whims of a nation into one indicator, but it’s a valuable nuance among the most prosaic indicators like industrial production.
The reason for the preamble is that UK consumer confidence improved in November (+3 points to -14). Seemingly in a last stand defence against the surging narrative of runaway inflation, blocked ports and energy prices doubling, the UK consumer feels better now than it did in October. Why is this so? In some ways, the job market is buoyant for those in specific sectors, and the prospect of an “un-encumbered” festive season may spur UK consumers. Moreover, before the confidence data, October retail says printed a 0.8% month-on-month growth, further supporting the sentiment.
But it also may be a leading indicator that the inflation noise may be petering out. On Wednesday, as reliable as clockwork this year, the UK inflation print exceeded expectations. The October index rose 4.2 year-on-year, dwarfing September’s 3.1% increase. As a result, GBP is nearing the 1.20 psychological barrier against EUR, its highest point since pre-pandemic, as investors position carry trades for an expected interest rate increase.
Yet, the consumer sentiment fits into the play that the BOE is praying will unfold, that inflation ripples from the past 18 months are reaching their end game, and 2022 may bring more settled conditions. The stark reality is that the UK almost feels like two economies running separately. While the furore about inflation, asset prices spiralling, and hot housing and rental markets run in one, in the other, it is business as usual, with belt-tightening, bargain hunting and job markets reopening. Everyone seems to think that a December rate rise is a foregone conclusion, but perhaps the glimmer of light this week will keep the gates locked for a while longer. The media is fuelling a hot labour market narrative right now, but it’s mainly in blue-collar sectors that Covid-19 and Brexit have impacted. For the white-collar economy, the labour market seems business as usual, apart from technology-related areas like programming. It also seems like households have been relatively prudent with savings, as demonstrated by the housing market and the race to have sufficient-enough deposits to buy.
Turkey cut rates for the third time in three months, despite runaway inflation and a tanking Lira (-6% to a record low). The general response to inflation should be to raise rates; naturally, the market punished the cut. Emerging markets rest on tenterhooks awaiting the end game of the Chinese real estate crisis, which took another turn this week as bailout hopes faded. Further to the issues in emerging markets is the strong dollar. As in the UK, US retail sales rose in October (+1.7% month-on-month), pushing up the dollar index. The pressure on the stronger dollar weighs on emerging markets due to import and relative coupon-servicing costs increasing. South African Rand and Mexican Peso are trading at annual lows, demonstrating the degree of surrogacy their economies’ fortunes have to the decisions of the Federal Reserve.
The advent of new Covid-19 restrictions in Europe was a stark reminder that we are not yet out of the woods. Lockdowns, of various degrees of limitation, have been put in place in Austria and the Netherlands. While the ECB is out of lockstep with the BOE and Fed regarding interest rate pressures, EUR trading at recent lows relative to GBP and USD demonstrates the lack of urgency to enact such change.
In its bi-annual financial stability review on Wednesday, the ECB noted the “exuberance” of housing markets, junk bonds and crypto assets as a risk to the system. Indeed, the same factors they highlighted are the concerns facing all central banks right now in the face of inflation; popping those bubbles may be the trigger for a deep recession. The only problem is that there is no significant answer apart from continuing as a going concern and kicking the can down the road further.
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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