October 21 2022
It is fair to conclude that this week has again been dominated by politics, with the resignation of Liz Truss stealing the headlines. This has been very well publicised in great depth and therefore we will leave it there. From an economic perspective in the UK, this week we saw the release of CPI to September. This came in at 10.1%. This was slightly ahead of the consensus forecast of 10% and given this did little to unnerve markets. The Bank of England is next due to meet on the 3rd of November. By reference to the latest Bank of England OIS forward curve, a 0.75% hike in rates is expected, which, if it is delivered, will take the base rate to 3%. This is higher than the predictions made at the start of the month, as we can see below.
The recent appointment of Jeremy Hunt, however, and the reversal of many of the fiscal announcement proposals made by Kwarteng, have lowered the expectation for the terminal rate. A forecast of 5.25% is now being completed which compares to the previous level of 5.5%. In signs that the cost of living is continuing to bite we saw UK retail sales for the 12 months to the end of September come in weaker than expected at -6.9% versus a consensus forecast of -5%.
Meanwhile, the latest implied terminal interest rate in the US is around the 5% mark, with the following change expected to take it from the 3%-3.25% range to the 3.75%-4% range. Whilst more rate hikes are forecast there is there the belief, or perhaps hope, that the peak in inflation in the US is already upon us, or soon will be. Whilst we continue to see wage and rent increases, these are very much seen as lagging indicators.
In times such as these, you will often find market commentators and analysts looking for trends which have stood the test of time. The latest from BCA Research shows that over time CPI inflation has held a close relationship, or followed a very close trajectory, with the ISM Manufacturing Prices Paid index, advanced by 3 months. The two however have very much gotten out of kilter of late, with CPI continuing its upward path whilst the ISM index has fallen quite sharply. If the previously close trend were to be restored this could imply that US CPI has peaked and a downward leg should, or perhaps it is better to say could, be expected. Could the ISM Manufacturing Prices Paid index be a leading indicator for CPI? Time will tell.
Speaking of leading indicators, the US Conference Board have published their latest set of data. This latest release certainly suggests that the US economy is heading for recession, although some would argue that they are already there. The US economy has already posted two consecutive quarters of economic growth which, technically speaking, is a recession. For now, however, giving reasons for a strong labour market, for example, the authorities refuse to call it one. Research by TheMacroCompass takes the information back even further. On each occasion that the same indicator drops below zero and stays there for two or more months, their research shows that the US then endures a recession. It is now below zero. How long has the US gotten before it has to declare that it is official?
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