Judging by which channels the televisions on the walls in the Columbia Threadneedle London offices have been on, the FIFA World Cup™ has been more interesting than financial markets this week. That said, there’s been plenty going on even with a very quiet end to the week with the US celebrating Thanksgiving yesterday and focusing on ‘Black Friday’ shopping today. We’ve seen updated PMI data, and probably wished we hadn’t, Chinese Covid data has continued to worsen, and the Federal Reserve minutes confirmed that they are looking to ease back the pace of interest rate hikes, a move that has already been well telegraphed to financial markets over the past few weeks.
The minutes of the Federal Reserve meeting that took place earlier this month were published. After 4 consecutive rate hikes of 75bps, the minutes reconfirmed the comments of various Fed members over recent weeks that the Fed was minded to ease the pace of hikes in the near future. They showed “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate”. The market consensus remains that the Fed will hike to around 5% by the middle of next year – what comes next is where there remains a mismatch. The Fed has guided that rates are likely to remain at the terminal level for some time, while market expectations are for rate cuts to follow soon after they have peaked. Expectations will continue to be guided by the inflation data; readers will recall the strong market rally after inflation was below expectations at ‘only 7.7% in October – but while inflation may well ease to 5% over the coming months, getting closer to the 2% target may be harder, though the lagged impact of rate hikes and a likely economic slowdown will be helpful. If the Fed insists on achieving their 2% inflation target rather than being comfortable with inflation above, but close to 2%, then a lot more economic pain will be needed, and this will impact the other side of their mandate – employment.
This week’s flash PMI data showed weakness across developed markets. While the eurozone PMI data was unchanged versus October, it remained well in ‘contraction’ territory, albeit not as weak as had been feared. For the UK, the PMI numbers remained in ‘contraction’ for the 4th consecutive month, with levels consistent with a decline of 0.4% in GDP in the final quarter of the year. Given the contraction in Q3, this would mean the UK is now in recession – as predicted by both the Bank of England and Office for Budget Responsibility. The US PMI data was the weakest since the first wave of the Covid-19 pandemic, with the combined services and manufacturing PMI far weaker than expected and well into ‘contraction’ territory. Japan also saw the first contractionary manufacturing PMI data for almost 2 years.
The economic data in China looks set to weaken in the short term as the country endures another Covid-19 wave. China reported new record levels of daily cases this week, surpassing the previous highs of April this year. The first Covid-19 fatalities for over 6 months were reported last weekend. While there remains plenty of expectation that China will ease restrictions in the medium term, most likely once their MRNA vaccine is approved and rolled out, it does seem like China will have to endure tighter restrictions over the coming weeks, if not beyond. CNBC reported that 412 million people in China are now under some form of lockdown restrictions, up 70 million in a week. The city of Beijing is not formally in a lockdown, but residents have been told not to leave the city, and schools, shops and restaurants are closed. It sounds a lot like a lockdown and will certainly have economic consequences.
The slowing economic backdrop was highlighted in the updated growth forecasts from the Organisation for Economic Co-operation and Development (OECD) published this week. The OECD expect “a significant global growth slowdown” next year to 2.2% followed by growth of 2.7% in 2024, led by emerging economies. They noted the war in Ukraine continues to affect economies unevenly, with Europe bearing the brunt of the impact on business, trade and higher energy prices. The UK economy is expected to contract by 0.4% next year; Germany is also expected to contract by 0.3% while the US and China are expected to see growth of 0.5% and 4.6% respectively. The OECD projections suggest the UK will be the only OECD country in 2024 with an economy smaller than it was in 2019. Grim reading, not least in the context of the ‘austerity’ due to kick in from 2025.
By the time you’re reading this, hopefully Wales will have progressed towards the second round with a win against Iran, and this evening England can qualify for the next round with a win against the USA. There are divided loyalties in the Willis household; I am supporting Wales (my first ever World Cup in my 46 years), our children are supporting England, and my wife is supporting Brazil, the country of her birth. It certainly means we have a lot of ‘must watch’ games in our house!
