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Last Week’s Highlights
Brent falls almost 5% on demand risks. Front-month Brent fell from $85 to $81 last week as demand worries retook centre stage. While Europe has shown the main signs of weakness, Chinese trade data sparked the sell-off last week despite being mixed. Crude imports rose from 11.2mn b/d to 11.4mn b/d last month, still up significantly from last year as China began to exit zero-Covid. Crude imports remained in line with the year-to-date average, while product exports marginally fell.
US inflation expectations spike… could they become unanchored? Both short- and medium-term University of Michigan inflation expectations surprised on the upside on Friday. While BEs have been well behaved at a tad above 2%, the University of Michigan’s short- and long-term inflation expectations have diverged higher. The most recent moves have happened despite lower gas prices – traditionally a strong driver of short-term consumer inflation expectations. For now, this data point strengthens Dominque’s case for a December hike.
European consumers continue to struggle… Retail sales in the euro area fell 2.9% year-on-year in September 2023, marking the 12th consecutive month of decline. MoM, they fell 0.3% versus an expected 0.2% decline. Sales of non-food products tumbled 1.9%, the largest drop since June 2022, with online trade also falling 1.9%. Conversely, sales of food, drinks, and tobacco surged 1.4% after many months of declines.
China is back in deflation. China’s October CPI of -0.2% came in weaker than the BB consensus of -0.1% and September’s print of 0%. With pork prices down 37% YoY according to HF data (vs. 22% YoY drop in September), the fall in the CPI was no surprise: local experts’ expectations were between -0.3% and 0.1%, according to Caixin. The core CPI fell 0.2% to 0.6% YoY. The rise in petrol prices failed to offset these declines in core and food prices.
The UK economy is still in the doldrums, but not yet in recession. Q3 UK GDP data came out flat on the quarter, with weak services but an uplift in manufacturing and construction. The market had expected even worse, though it aligns with BoE expectations. We expect that the UK is nearer to recession than elsewhere, with households under particularly high pressure.
What to Watch
Could CPI shake up market complacency? Consensus currently expects core inflation to rise 0.2% MoM, and Dominique agrees. Two things will be important this month. The first will be the decline in gasoline prices driven by lower oil and gasoline cracks. This will impact headline inflation but not core. The second is the increase in medical care services, which could shift core inflation higher by 5-10 bps. For the Fed, the most important part of the release will be the housing and supercore (core services ex. housing) services. Dominique does not expect big downside risks this month.
Across the pond… UK inflation to fall sharply! Wednesday sees UK inflation data (following Tuesday’s equally important labour market data). Consensus expects a sharp drop to below 5% YoY (from 6.7% in September) due to household energy price reductions.
The labour market data will be an incomplete reading again, containing only an experimental estimate for the labour force survey employment and unemployment numbers. Wage growth will be key, as will vacancies (which are showing continued loosening). The BoE is wary the ONS numbers overstate wage growth but nevertheless use them heavily in their forecasts.
How tight is Australia’s labour market? On Friday, we get Australia’s most important data release of the week. Consensus is expecting a 24.5k MoM in employment. However, the recent makeup has favoured part-timers as we head into the Australian summer. Consensus has pencilled a slight increase in the unemployment rate to 3.7% from 3.6% (3.56% to 2dp).
The Week Ahead: Watch Dominique and Andrew discuss Powell’s latest speech, and why he tried to warn against recent loosening in financial conditions. Dominique also delves into what she expects from US CPI this week and why December FOMC remains a live meeting!
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer, a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)