Economic Update

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Bond yields lift the US$, flatten stocks

In less than shocking news US inflation data last week showed the FED will need to stick to its aggressive and possibly economically destructive path. We have a succession of FED speakers on Thursday and Friday which is unlikely to change much but just in case its best to pay attention.

Consumer and retail demand in the US appears a little resilient although retail sales showed no change against market expectations of a slightly higher reading, but we are someway into the inflation cycle and it seems to have left the consumer indifferent… presently.

Stocks didn’t like the inflation numbers and weakened on the week and with 10 year US yields closing around 4% it will require a drop and a sustained one at that to see any sustained rallies. The mood is overridingly pessimistic for world growth presently and hence a cold market for stocks.

However its good news for US$ holders especially those who sold Yen to buy US$ the Bank of Japan or more accurately the Ministry of Finance have watched the Yen depreciate some 2.5% more since they intervened and the reality is that the gulf between Japanese near zero rates and the US will only encourage selling of Yen. There is a change in rhetoric toward “speed of change” rather than the actual price but that more an acceptance of reality than much else.

The bind that the Japanese authorities find themselves in is as nothing in comparison to the British. The Prime Minister sacked her Chancellor and replaced him with Jeremy Hunt and reversed the tax cutting mini budget that caused the Gilts and Sterling crashes. Hunt has subsequently said taxes may need to rise and no one has explained how the intervention in energy markets will be paid for. Its being speculated in the press that the government is now being run by Hunt – either way it doesn’t look good to the rest of the world.

The Bank of England have been buying Gilts (UK Bonds) and that ended on Friday (its not to say they wont step in again) so if gilts continue their decline, leaving pension funds with no option but to join the selling to retain their capital adequacy then Sterling may be in for a rough week as investors confidence in the British government and its assets may be damaged irrevocably.

China has its Communist Party Conference this week and economically there’s unlikely anything newsworthy but they have reaffirmed commitment to “zero covid”; which is both impossible and uneconomic so the worlds second largest economy isn’t likely to contribute much else than hyperbole and control of their populace for sometime. 

The Chinese situation means that commodities are likely to struggle to break out of recent ranges but any uptick in sentiment is going to bring continuing supply tightness to the fore.

Oil fell back after the 2m barrel output reduction by OPEC+ although Bidens anaemic warning to Saudi of “consequences” had no impact and looks a bit delusional.

Date

Country

Figures

Expected

Previous

Oct 17

China

Balance of Trade

$80B

$79.38B

Oct 18

USA

Industrial Production YoY

3.4%

3.7%

Oct 19

GBP

Inflation Rate YoY

9.9%

9.9%

 

EUR

Inflation Rate YoY

10%

9.1%

Oct 20

USA

FED speakers

 

 

 

USA

Initial Claims

230K

228K

Oct 21

GBP

Consumer Confidence

-53

-49

 

GBP

Retail Sales

-0.3%

-1.6%

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