Weaker economic data releases across the world present challenges for policy decisions about inflation, and markets remain volatile as the Bank of England forecasts a recession in the fourth quarter.
Higher for longer
Economic data releases across the globe remain mixed, but broadly reaffirmed weaker activity data, robust employment figures and cost of living challenges, with the latter pronounced in the UK and Eurozone due to rising energy costs. US non-farm payrolls confirmed that employment in the US is above prepandemic levels, with unemployment at 3,5%. Although the headline figures hide differences between sectors, this is nonetheless the lowest level of unemployment since 1969. This provided another data point that the underlying US economy may not be weak enough to prompt a pivot from policymakers. With equity markets already on the backfoot by mid-month after the release of hawkish minutes from the July US Federal Open Market Committee meeting, all eyes were on the gathering of central bankers at Jackson Hole for further guidance.
While still high, global PMI data showed a moderation in pricing pressure, while freight costs and supply chain indicators all confirm some easing in the factors that have added to inflation since the onset of the pandemic. Similarly, soft commodity prices have subsided from their highs. Combined with a lower oil price, factors appear to be lining up for a peak in inflation in several countries around the world. This may include the US, where CPI for July benefitted from lower fuel prices and decelerated to 8,5% yoy in July, below expectations of 8,7% yoy. There is no doubt, however, that there have been false starts on this front, which suggests policymakers will not take their foot off the pedal until it becomes clear that there is persistence in the downward trends toward inflation targets.
China announced further stimulus measures amidst lacklustre economic data releases. So far, policy support has done little to reinvigorate economic activity, which is still subdued in the face of periodic lockdowns and an embattled property sector. Nancy Pelosi, Speaker of the US House of Representatives, visited Taiwan, stirring geopolitical tensions. China responded by enforcing trade restrictions with Taiwan and military drills around the Strait. While matters did not escalate, it emphasises the importance of the region for global trade access and the underlying instability of global diplomatic relations at the moment.
The Bank of England (BOE) hiked interest rates by 50 bps in August, the largest increase since 1994. A multi-decade high inflation print of 10,1% for July confirmed a challenging inflationary backdrop but equally concerning was the BOE forecast that the UK economy would enter a recession in the fourth quarter of this year, with the possibility of this lasting up to five quarters.
While there have been divergent views on future oil demand from OPEC+ members and the International Energy Agency, it is likely that supply would be impacted by the energy crises in Europe. While leaders consider possible interventions to manage costs, including price caps, European gas prices increased by approximately 33,7% in August. With the EU embargo on seaborne oil from Russia and the ban or limitation of insurance planned from December, gas availability from Nordstream 1, the gas pipeline connecting the Russian state-owned entity Gazprom and Europe, dropped to zero for three days into September, underscoring the possible retaliation. Despite volatile trading, the Brent crude oil price took guidance from weaker global growth expectations and declined by approximately 12,3% over the month.
After some reprieve in the previous few months, market volatility escalated in August. While several fault lines could have been the driver, the selloff escalated when US Federal Reserve Chair, Jerome Powell’s speech at Jason Hole confirmed that monetary policy will remain hawkish for longer – a counter to the market’s excessive optimism that the Fed would slow down or start interest rate cuts as early as 2023. This also helped the US dollar gain 2,6% on a trade-weighted basis over the month, bringing year-to-date appreciation to 13,3%. European indices bore the brunt of surging energy prices while global bond markets lost ground, with the US 10-year bond yield rising to 3,1%. The Bloomberg Global Aggregate Bond Index retraced by 3,9% in August, bringing the year-to-date losses to 15,6%.
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