The Week Ahead: UK inflation, autumn statement;
The latest UK inflation data for October, alongside new UK chancellor Jeremy Hunt’s autumn statement, take centre stage on the macroeconomic front this week. After the headline CPI number rose to 10.1% in September, and core inflation edged up to 6.5%, all eyes will be on whether prices have continued to rise. Looking ahead, anticipated tax rises and spending cuts from Thursday’s mini-budget could play a part in slowing inflation.
OUR TOP 4 EVENTS: 14-18 NOVEMBER:
Tuesday: China retail sales (October)
Last week’s China trade numbers for October showed that imports and exports fell into negative territory, speaking to the fact that the Chinese economy has continued to underperform. In August consumer spending rebounded strongly, rising 5.4%, however this improvement wasn’t sustained into September, as sales fell back to 2.5%. This suggests that the August pickup was primarily down to pent-up demand being released. China’s zero-Covid policy will continue to drive the numbers here, and while we’ve heard that the Chinese government is wargaming some re-opening scenarios, prompting some optimism that it could happen soon, this comes across as wishful thinking. With the weather starting to get colder and heading into winter infections can only go one way. That fact will make any sort of reopening impossible unless China changes tack. This seems unlikely; therefore, we can expect to see many months of poor retail sales numbers as we head into 2023. October retail sales are likely to slow from the numbers we saw in September with a rise of 0.7% expected. Industrial production is expected to slow from 6.3% to 5.2%.
UK Unemployment & average earnings (September)
If there was a silver lining with respect to the bleak economic outlook then it’s in the form of a low unemployment rate, which fell to a 48 year low of 3.5% in the 3 months to August. Wage growth including bonuses also edged higher to 6%, over the same period, but once again the focus was on the economic activity rate which rose to a record high of 21.7%. The number of long-term sick rose to 2.5m, while job vacancies fell by a modest 46k, to 1.25m. This remains the elephant in the room when it comes to the wider unemployment numbers, however vacancy rates still remain at elevated levels which means that there’s unlikely to be a spike in unemployment levels in the short term.
Wednesday: UK consumer price index (October)
UK inflation got a bit of a respite in August, falling back to 9.9% from 10.1% in July, with the fall in petrol prices helping to pull the headline number back below double figures. This didn’t last very long though, as prices edged back to 10.1% in September, with food prices continuing to act as a tailwind, up from 13.1% to 14.6%.
The rise in core prices is also starting to become a larger concern, despite the stabilisation being seen in energy prices in the last few months. Having raised interest rates by 75bps last month, the Bank of England will be hoping that we don’t move too much higher than the 6.5%, and 40-year high, that prices edged up to in September. The new government’s fiscal plans could also play a part in slowing inflation, with the various tax rises and spending cuts. There’s no better way to slow inflation than to kill demand, which is what the government’s new plans look set to do.
Wages are holding up reasonably well on a historical basis, but remain well below headline inflation levels. More encouragingly, producer price index (PPI) inflation does appear to be showing signs of slowing, which could translate into lower inflation as we head into 2023.
Thursday: UK autumn statement
We should get final details of the various spending cuts and tax rises that the new government is set to earmark, when it comes to addressing the so-called £40bn black hole in the public finances. The last few weeks have seen UK gilt markets, as well as the pound, come under pressure over concerns about the sustainability of the UK’s public finances. Since the change of leadership at the top of government, these concerns have abated, as has the pressure on the pound and gilt yields.
What is more concerning is that the framing of the discussion hasn’t shifted at all in terms of convincing the markets that future spending plans will be properly scrutinised, compared with the damage that these measures will do to the economy. This fixation on what to all intents and purposes is an imaginary black hole, premised on a host of false assumptions, is likely to be hugely damaging to the UK economy. The market didn’t care when the government was spending almost £350bn on various Covid-19 support measures in the previous fiscal year, yet we’re supposed to believe that suddenly there’s huge concern about a £35bn fiscal hole that the government suddenly need to plug.
The UK government doesn’ t have to embark on a host of spending cuts on big infrastructure projects which are sorely needed if they are serious about levelling up. They simply have to convince the markets that they have a credible long-term economic plan they can implement over a five-10-year period, rather than impose a plan that no other country in Europe is pursuing. And where countries like Germany are spending billions of euros more in supporting their economies – without any penalty when it comes to borrowing costs.
Overall, we had another solid risk on week in global equity markets and I’d expect that theme to continue this week. There’s been a significant unwind in short or hedged positioning resulting in aggressive moves higher across asset classes. It’s too early to say we’re out of the woods but the signs look favourable and buying dips in equity indices and selling rallies in the USD with well managed risk is the order of the day.
