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11 Oct 2023 | 5 minutes to read
Attacks against Israel over the weekend have sadly led to many casualties. The first rocket attack, by Hamas militants, targeted civilians on Saturday morning. Militants then stormed the disputed Gaza strip. Israel responded with an attack on Gaza, laying “complete siege.”
So far, the market response has been measured. US treasury yields have pulled back, reflecting diminished risk appetite. Oil prices have jumped higher, having been in decline for the last week. The economic impact of the conflict is likely to depend on how it evolves and impacts energy markets. Iran is alleged to be supporting Hamas, and retaliatory military action against Iran may be possible. Iranian oil output is therefore likely to be hindered firstly by the stricter imposition of sanctions, and possibly by military disruption. This could constrict global oil supplies, though other OPEC nations could boost output. While oil prices have weakened in recent weeks, the general trend since June has been strengthening. Recent events provide a new spur to prices which may be inflationary, raising the chances that interest rates will remain high for longer.
US labour market data on Friday reinforced expectations that easing by the Federal Reserve could be a way off. Non-farm payrolls surprised, rising 336,000 instead of 170,000 as expected by the market. Despite this, the unemployment rate remained unchanged at 3.8% and wage growth decelerated to 4.2%. Other labour market data from the Job Openings and Labour Turnover survey painted a softer picture. Job openings did jump 8% in August, but this followed several months of falls. On a year-on-year basis, openings remain 6% down, hires 10% down, voluntary quits 14% down and lay-offs 3% up. While the labour market does appear to be slowing, headline data arguably remains too strong to warrant rate cuts at this point.
The Speaker of the US House of Representatives, Kevin McCarthy, was deposed last week following a showdown over government spending. US lawmakers faced a government shutdown at the end of September if Republicans and Democrats could not resolve a budget dispute that would extend government funding to November. Unusually, a deal was not just blocked by disagreement between Democrats and Republicans, but within the wider Republican Party with politicians further to the right of the party seeking larger spending cuts. McCarthy had earlier worked with moderates on both sides to announce a stop-gap funding proposal, which the Senate approved. This deal will not include additional funding for Ukraine or border security, measures the Democrats have called for, but does fund government activity through to the 17th November. However, hard-liners used this opportunity to depose McCarthy. The House must now find a new leader quickly: if it cannot carry out legislative business by the 17th November, some government activities may halt in November. Any impasse may complicate the US’s response to recent events in Israel and Ukraine, heightening policy and political risk.
While growth has broadly been stronger than expected in 2023, eurozone data is showing signs of weakness. Business surveys for the region remain broadly in contractionary territory, with both services and manufacturing weakening. Last week’s retail sales data was also soft – on a year-on-year basis, the decline in retail sales accelerated to 2.1%, from 1% in July. This more than offsets increases in May and June. Weaker consumption demand, at a time when manufacturing output is already slowing, is likely to weigh on growth this year.
The Conservative Party’s annual conference took place last week. From a fiscal perspective, the scrapping of large parts of the HS2 rail scheme was the most significant announcement, though the funds will be redeployed on local projects. Given the Conservatives’ poor polling, they are not expected to win the next election, which must take place by the end of January 2025. Tax cuts are expected, in a bid to win over voters, but the current fiscal rules will limit the scope for extra spending.
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