A more subdued week for financial markets as various members of the US Federal Reserve sought to play down market excitement we saw late last week after US inflation was lower than expected. The ‘higher for longer’ narrative on interest rates weighed somewhat on market sentiment. In the UK the autumn fiscal statement highlighted the weakness of the UK economy, which will likely be compounded by fiscal austerity, while in the US, a certain ex-President made clear he wants his old job back…
The UK Chancellor’s autumn statement delivered around £55billion of fiscal tightening, in line with expectations. The market response was muted given it was clear in advance the government had moved a very long way their economic philosophy from Kwasi Kwarteng’s mini-budget in September. That budget delivered the biggest tax cutting plan for 50 years; in contrast Jeremy Hunt’s statement yesterday was the biggest tax raising plan for 30 years. The £55 billion of tightening was broadly split between £30 billion in spending cuts and £25 billion of tax rises. However, most of the spending cuts have been deferred until after the next election, which will take place in January 2025 at the very latest. A nice ‘hospital pass’ for the next government there. The headlines were dominated by the increase in the energy price cap for an average household to £3,000 from next April, the windfall tax on energy companies rising to 35% and extending to 2028 and the freezing of various tax thresholds along with lowering the threshold for the 45% tax rate down to £125,140. The Office for Budget Responsibility released their economic forecasts – they noted work began on this forecast in late July since when the UK has seen three Prime Ministers and three Chancellors. Since July their forecasts have been revised 7 (seven) times, and reflect policies announced in 5 fiscal statements that have taken place since March. Incredible times. The OBR see the UK economy as already in recession and expect the economy to contract by 1.4% in 2023 with it not recovering to pre-pandemic levels until late 2024. They expect inflation of 9.1% this year, easing to 7.4% next year and then falling off rapidly. Living standards will fall by over 7% over the next 2 financial years; this is despite over £100 billion of government support. This decline will wipe out 8 years of growth. The OBR’s assessment of the public finances and economic backdrop was therefore bleak; they also noted a “very large fiscal event” by 2027/28 when, if current fiscal plans play out, a £67 billion hole in the public finances will need to be filled. That’s too far in the future for politicians to concern themselves with but highlights that in an era of low economic growth, more normalised interest rates and maybe less forgiving financial markets, future governments will continue to have limited fiscal scope to support economic growth.
The G20 meeting of world leaders in Bali generated lots of headlines. The communique said that today’s era “must not be of war” and “most members strongly condemned the war in Ukraine and stressed it is causing immense human suffering and exacerbating existing fragilities in the global economy”. Russian President Putin did not attend the summit, with Foreign Minister Sergei Lavrov briefly attending in his place. Chinese President Xi Jinping said that the G20 “must resolutely oppose the attempt to politicise food and energy issues or use them as tools and weapons”. This is as close to a public condemnation of Russia as we have seen from China. Ukrainian President Zelensky addressed what he called “the G19” (i.e. excluding Russia) and repeated his call for the total withdrawal of Russian troops from Ukrainian territory. He noted Russia’s ongoing attacks against energy infrastructure – some 40% of Ukrainian electricity production has been damaged in the past six weeks – and said “all of you can witness what the Russian terror is aimed at now. This is an attempt to turn the cold [i.e. winter] into a weapon against millions of people”. With European gas reserves filled and a glut of LNG in the short-term financial markets are looking elsewhere for now, though a missile (now thought to be a Ukrainian defence missile fired at a Russian rocket) landing in Poland and killing 2 people was a stark reminder that this war is taking place on NATO’s borders. The G20 also saw President Biden and President Xi meeting face to face for the first time as leaders. The meeting surpassed low expectations, with a follow up meeting arranged for US foreign secretary in Beijing early next year. After a 3-hour meeting, Biden said, “I absolutely believe there need not be a new cold war” and said he believed Taiwan faced no “imminent” threat of Chinese invasion. Both sides promised to maintain communications on a range of issues, including climate change, economic stability, and food security.
It has been a busy week for economic data, not least in the UK, where the latest inflation and employment data was published. October saw CPI reach 11.1%, higher than expected and up from 10.1% in September to a 41 year high. Core CPI (which excludes food and energy) was up 6.5% year on year. Inflation continues to be driven by food and particularly energy – without the energy price guarantee, the Office for National Statistics estimated inflation would have been 13.8%. Food prices were up 16.4% year on year, while the ONS reported that households were paying 88.9% more for gas and electricity than 12 months ago. The energy price guarantee meant that figure was not even worse, but gas and electricity prices still went up by 36.9% and 16.9% respectively between September and October this year. The combined increase in the inflation basket was 24.3%; in the absence of the energy price guarantee this figure would have been an incredible 75%. The unemployment data showed an increase in payrolls of 74,000, ahead of expectations. However, the unemployment rate climbed slightly to 3.6%. Wages rose by 5.7% year on year; in real terms however, they fell by 2.7%. Further afield, Japan reported disappointing Q3 growth numbers, with the economy contracting by 0.3%. This number was skewed by strong import figures, which suggests that the backdrop is not as bad as the headlines suggest. The US saw PPI data, a lead indictor for inflation was lower than expected, adding impetus to the lower-than-expected CPI data last week and giving markets hope that the Federal Reserve would ease back on the pace of interest rate hikes next month. China reported poor numbers for both retail sales, which shrank by 0.5% year on year in October while industrial production fell short of expectations, growing by just 5.0%. The impact of Covid is once again weighing on the economic data. China reported over 20,000 daily cases on several occasions this week, with lockdowns in many areas including the city of Guangzhou, with a population of over 15 million.
Elsewhere in politics the Republican Party has taken the majority in the US House of Representatives – vote counting has been painful but the Republicans now have 218 seats versus the Democrats on 211, with 6 results still to be declared. Meanwhile, we will not need to wait for the runoff in Georgia in early December to discover which party controls the Senate after the Democrats secured a majority after winning in Arizona and Nevada. We also heard from ex-President Donald Trump who announced his intention to run for the Presidency in 2024, in his words, to “make America great and glorious again”. As I mentioned last week, he may not have a clear run at the Republican nomination, after many of his preferred candidates performed poorly in the mid-term elections and with other Republicans, such as Florida Governor Ron DeSantis, in the ascendancy. All the same, Trump still commands significant support among Republican voters, and declaring his candidacy this early in the race for 2024 appears designed to remove all challengers as soon as possible. Trump may face another challenge however, from the legal side. Bloomberg reported the ex-President faces multiple investigations into the removal of classified documents from the White House, his role in attempts to overturn the 2020 election result, and into his inflating the values of Trump real estate assets. Fun and games ahead….
