This week has seen the focus firmly on the US, where there has been plenty going both in terms of economics and politics. We saw the latest inflation and employment data released, and the midterm election results point to political gridlock for the remainder of President Biden’s first term of office, but a ‘less bad’ outcome for his Democratic Party than many had expected.
The US mid-term election results are yet to be fully declared but a Republican ‘wave’ has not taken place. While the Republicans look set to win a slim majority in the House of Representatives, where every seat was up for re-election, in the Senate, where only a third of seats were up for election, it appears the Democrats may continue to hang on to power. Much like in 2020, the state of Georgia will go to a runoff, the result of which will not be known until early December. Despite the loss of the House, this appears to have been a good ‘defeat’ for the Democrats – the outcome had the potential to be far worse. Indeed, a loss of around 12 seats in the House compares to Trump losing 42 seats in the 2018 mid-terms and President Obama losing 63 seats in his first mid-term elections in 2010. This represents a relatively strong performance for President Biden’s administration, not least in the context of the economic backdrop. While the Republicans may have failed to deliver a huge sweep of victories against a relatively unpopular President at a time of slowing economic growth and weak consumer sentiment, it is not clear yet whether the disappointing results for the Republicans will slow the momentum Donald Trump (remember him?) has towards standing for the 2024 Presidential election. Trump has promised a “big announcement” next Tuesday. In terms of the Republican nomination, he may well not have a clear run, given the success of Ron DeSantis, who was re-elected as Florida Governor with a huge majority. DeSantis is seen by many Republicans as a more palatable version of Trump. 2024 may be a while away but the noise will only increase from here. In the meantime, a divided Congress will likely mean that in terms of policy very little will change in the next two years – President Biden will be unlikely to be able to push through significant policy change without getting bogged down in Congress. Likewise, without significant majorities, Congress will be unlikely to impose much change on the President, who will still have the power of veto. Political gridlock is normally a positive backdrop for financial markets; indeed, the third year of a Presidency is historically a very strong one for equities, though with a recession potentially looming it may be different this time. From the international politics standpoint, the Republican’s limited progress in taking seats in Congress also means support for Ukraine from the US is more likely to continue. Some Republican candidates had expressed concern at ongoing support for Ukraine and the costs involved.
The US reported another strong set of employment data for the month of October, with 261,000 jobs created, well ahead of consensus expectations. While the unemployment rate rose slightly, to 3.7%, this report was once again consistent with a solid economic backdrop, and in turn points to the Fed not deviating for now from their intended path on interest rates. The inflation data was the big market moving event, with equities and bonds rallying strongly while the US Dollar weakened sharply as CPI for October came in lower than expected. The US saw CPI at 7.7% year on year, versus 7.9% expected. Core CPI, which excludes food and energy, was also lower than expected, at 6.3%. The slowdown in inflation gave hope to the narrative that the Federal Reserve will ease back on their trajectory for hiking rates. Markets are pricing a 50bps hike at their next meeting in December, a reduction from the 75bps rises we have seen at recent meetings. We also saw China reporting inflation data – with levels a marked contrast to those we are experiencing in the west. Chinese CPI for October was 2.1%, lower than expected and down from 2.8% in September, which was a 29-month high. Producer Price Index data, a leading indicator for inflationary trends, fell by 1.3% year on year; this was the first outright decline in 2 years. This morning the GDP data for the UK for the third quarter was published. The data showed the economy shrank by 0.2% during the quarter; if the Bank of England is correct, this will be the first in a long series of quarters when the economy will shrink. With the economy shrinking by 0.6% in September, the UK economy is now 0.2% smaller than it was in February 2020 and the onset of the pandemic.
Hong Kong and Chinese equities once again tried to move higher on speculation over China easing Covid restrictions. This comes even as daily cases topped 10,000 yesterday – a very large number for China and the highest levels since May. Over the weekend the National Health Commission reiterated that the government would stick “unswervingly” to their zero-tolerance Covid strategy. The Wall Street Journal reported discussions had taken place over softening policy, but there was no timeline in place for any changes. We did see some relaxation on the number of days quarantine required for inbound visitors and close contacts of people testing positive. We may well need to be patient given how entrenched the zero-Covid regime has become in China, with more progress needed on vaccines, falling cases and the passing of winter flu season before the Chinese government decides to ease back on their restrictions.
