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We standardise WoW price changes across different markets to allow for cross-market comparisons.
Last Week’s Highlights
Guess what? The US consumer remains robust! Last Tuesday, US retail sales provided the bond market with news it neither wanted nor needed. Retail sales came out stronger than expected across the board at 0.7% MoM (3.8% YoY) and 0.6% ex. gas and autos. Similarly, industrial production was 0.3% MoM versus expectations of no growth. The combination of these two beats added further fuel to the bond market fire as 10-year yields rose another 30 bps to almost 5%. Higher US yields remain the dominant theme in the markets today, continuing to increase pressure on equity markets globally. The S&P 500 fell over 2% last week but remained one of the strongest markets globally (Charts 1, 3 and 4).
Unlike the US, the UK consumer struggles. Not all economies are equal, and the differences between the US and UK consumers are becoming increasingly stark. UK retail sales fell 0.9% MoM, reversing last month’s 0.4% increase and coming in worse than market forecasts of a 0.2% fall. Ex-fuel retail sales were -1.0% MoM versus a 0.6% gain last month. What drove this decrease? Sales at non-food stores fell 1.9% driven by weaker sales of furniture, watches, jewellery, and clothing as the cost-of-living crisis continues to bite. However, on a year-on-year basis, retail sales fell only 1%, the lowest decline in six months.
China’s economy may have stabilised… for now. In line with our growth tracker, Chinese economic data beat market expectations. GDP grew 4.9% YoY versus expectations of just 4.4%. Driving this was a large beat in retail sales, which grew 5.5% YoY, and industrial production, which grew 4.5% YoY. The unemployment rate also came in below expectations at 5% versus 5.2% previously.
US oil inventories swing back to declines. The EIA weekly petroleum status report contained many positives last week. Commercial crude inventories fell 4.5mn barrels to 420mn, while gasoline stocks fell 2.4mn barrels to 223mn barrels and back to their five-year average. As expected, gasoline demand bounced back to 8.9mn b/d, up 0.3mn b/d since last week. This likely reflects gas stations making up for reduced purchases two weeks ago. So we are back to pricing in a tight oil market, with Brent hovering around $90 and some geopolitical risk premium priced in. In the short term, we expect oil prices to fall somewhat assuming the tensions in the Middle East remain subdued.
What to Watch
Is transitory disinflation now over? Markets will focus on PCE (Friday). Dominique agrees with consensus of +0.3% MoM and expects an acceleration in housing and super core PCE, in line with the CPI. The market reaction will be key to watch. Can the release keep yields elevated, and with it the dollar? Focus will remain on whether a new Speaker can be elected, too.
Big tech earnings. Much of the equity market strength this year has been driven by a few companies that benefit from the AI theme. Wednesday sees Microsoft report earnings, followed by Meta on Thursday, and finally Amazon and Apple on Friday. Microsoft and Apple will be the key companies to watch. Microsoft was unable to beat and raise their guidance last quarter, so the market will want to see renewed momentum this time. Meanwhile, Apple will update us on the sales of the new iPhone 14. Both stocks are relatively expensive, so markets will likely take misses poorly!
Will the BoC hike this week? Across the border, the BoC are due on Wednesday. We expect a hawkish pause given core inflation momentum has failed to fall, once again, while the labour market has tightened since the last meeting
Turning to Europe… we have the ECB. Henry expects them to hold rates stable, with the deposit rate at 4%. Given this is consensus, the statement and presser will be more important. Specifically, Henry will look for the ECB’s view on recent inflation, the impact on the economy of higher bond yields, whether hikes remain an option, how they push back on cuts, how they are considering recent fiscal shifts, and whether any policy adjustments could be made. There will be a lot to digest!
Across the channel… Henry expects the UK labour market loosening to continue. Last week’s CPI release gave us greater confidence to be short GBP given the price action afterwards.
Down under, Q3 CPI will be the highlight of the week, with the trimmed mean number the one to watch. Markets have trimmed expectations to +1.0% QoQ for Q3, from +1.1% last week. Any surprise more in line with last week’s expectations would put Bullock under pressure – she will stand in front of Senate Economics Committee later this week. We expect a November RBA hike, while the market is only pricing in a 25% chance.
Last but not least… watch for the Swedish ETS this Thursday. The influential survey tends to be a solid indicator for GDP YoY and has resumed its decline, showing the growth picture may be deteriorating. We think the economy could do worse than forecasted.
The Week Ahead: Watch Dominique and Andrew discuss next week’s US GDP print. Dominique also asks what current high yields and high debt mean for markets.