Bare Hunt

A good week for

• Fixed income, notably European government (+2%) and UK index-linked (+1.6%) debt
• UK equities, up +1.1% muted markets

A bad week for

• Oil, with Brent crude prices declining 8.7%
• Gold, which fell 1.2%

UK budget

Jeremy Hunt revealed the Autumn Statement last week - his first budget as Chancellor - with the aim of shoring up the treasury’s balance sheet and restoring credibility following the Truss/Kwarteng ‘mini-Budget’. Economists and financial markets were both broadly satisfied that the announcement succeeded. The fiscal package was designed to reduce public borrowing in each year from 2024/25. By 2027/28 borrowing should be lowered by c. £55bn (approx. 1.9% of GDP). Around half of the savings will be achieved via spending cuts, with the other half coming through tax. This includes windfall taxes on energy companies, the freezing of a number of tax thresholds (as well of a reduction in the threshold for the highest rate of income tax) and cuts to dividend and CGT allowances. The tax burden is now at the highest level since the Second World War. However, many of the spending cuts are penned for after the next general election, calling into question whether or not they will ultimately come to pass. The chancellor believes the UK is now in a recession that began in Q3 2022 and will likely last a year. Clear signposting from the treasury leading up to the announcement meant the market reaction was fairly muted.

Inflation and wage growth

UK Consumer Prices Index (CPI) inflation hit a 41-year high of 11.1% for the 12 months to October 2022, up from 10.1% in September and exceeding the forecast reading of 10.7%. Volatile food and energy prices continue to drive inflation higher, with the Office for Budget Responsibility now predicting that UK CPI will average 7.4% in 2023. These figures continue to outstrip UK wage growth, which climbed to 6% between June and August, meaning a hit to living standards. Real household disposable income is estimated to fall by c.7% by 2023-24. Meanwhile, in the US, Producer Price Inflation rose by just 0.2% in October, offering a glimmer of hope that peak-inflation may finally be drawing near and goods disinflation (a slowing in the rate of change, rather than a fall in prices) is underway. Demand slowing ought to tame inflation further in due course. Further evidence of peak-inflation may encourage the US Federal Reserve to raise interest rates by a lower margin - perhaps 50 basis points - at their next meeting. Elsewhere, in Japan inflation in October hit its highest level since 1982. At 3.6% year-on-year, it is some way above the Bank of Japan’s (BoJ) 2% target, but the BoJ is likely to resist calls to raise interest rates in response.

G20

Meeting at the G20 summit in Indonesia, Presidents Xi and Biden dialled down the rhetoric on recent geopolitical tussles. The pair, who had not met since before Biden’s presidency, appeared to seek to build on rather limited chemistry. In reality, however, little has changed. Biden has sought to strengthen Trump-era tariffs and recently introduced sweeping rules to prevent China from using any US-related semi-conductor technology; and China maintains its long-term claim on Taiwan. Meanwhile, Russia’s claim over Ukrainian sovereign territory was centre-stage as President Zelensky addressed the “G19”. A missile strike which hit Polish soil near the border with Ukraine briefly escalated tensions as NATO sought to clarify responsibility. Markets barely reacted to the conflagration. But the immediate consequences of Russia’s invasion of Ukraine, and the potential for longer-term structural geopolitical change, are clear to see.

US midterms

The results of US midterm elections were finally confirmed last week. The US Congress is now divided, with the Republican Party taking control of the lower chamber, the House of Representatives, while the Democrats retained control of the Senate. The results were broadly seen as a reasonable outcome for President Biden and the Democrats, given a surge in support for the Republican Party (which was anticipated in some quarters) did not materialise. However, the split across the two chambers will impact the Democrats’ ability to pass significant legislation ahead of the 2024 Presidential election.

China industrial production

Chinese industrial production - including output from manufacturing, mining and utilities - expanded by 5% year-on-year in October. The data was weaker than consensus forecasts and behind last month’s print of 6.3%. Chinese retail sales data also fell by 0.5% in October. Two things explain these data: global goods demand is slowing somewhat; and Covid-19 restrictions continue to impact millions of people in larger Chinese cities amid rising cases in certain areas. These outbreaks come after Beijing signalled plans to relax some measures just last week, with freer domestic and international travel and less stringent quarantine measures.

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