UK: Stagnating Growth

Real GDP per head is estimated to have fallen by 0.1% in Quarter 3 of 2024, the ONS said today. This is a failed state. If we cannot grow real GDP in a broadly expansionary period of growth, then we are failing. No amount of wind farms, carbon capture rubbish, and tweaking the fiscal rules to spaff just to more money on unproductive people is going to help. Someone needs to turn the tap off for a bit.

US: Fed Signals Cautious Stance Amid Inflation Concerns

Stocks have turned a bit lower as the FOMO euphoria of the Trump bump ran out of steam a bit, with the Fed stressing that a hot economy could warrant tighter monetary policy for longer. European equities are a little softer at the start of the session but haven’t really moved over the week. US equity markets slid around half a percent or so as Fed chair Jay Powell said the central doesn’t need to be “in a hurry” to reduce interest rates. Which is kind of strange since they rushed into a panicky 50bps cut in September.  Chance of a hold in December now up to 40% - had been 82.5% chance of a cut 24hrs ago. Markets are driving this – the Fed has cut 75bps since September 18th, whilst the 2yr has risen by that much in the same time. 

“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said in a speech to business leaders in Dallas. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”  

The remarks follow a slight uptick in inflation last month. US CPI (Oct): Headline (MoM): 0.2% vs. 0.2% exp. (prior 0.2%) Core (MoM): 0.3% vs. 0.3% exp. (prior 0.3%) Headline (YoY): 2.6% vs. 2.6% exp. (prior 2.4%) Core (YoY): 3.3% vs. 3.3% exp. (prior 3.3%). Notably, Shelter came in hot at +4.9%, transports were hot + sticky at +8.2%. Core PPI meanwhile advanced 3.5%.

We’ve seen the tacit acceptance of higher inflation, now it’s moving into the explicit phase. The Fed will probably be quite happy with a market crash...I find the idea of a market correction coming early next year as the long end of the yield starts to blow out quite compelling.  

Examining tariffs and inflation: The US economy seems in pretty good shape: jobs are not scarce, inflation has a 2 handle...but could tariffs be a problem? President Trump’s tariffs on imports led to job losses and higher prices. “We find that tariff increases enacted in 2018 are associated with relative reductions in manufacturing employment and relative increases in producer prices,” one 2019 report by Fed economists Aaron Flaaen and Justin Pierce said. 

Tariffs are generally seen as leading to higher inflation. Sure, if Trump presses ahead with the toughest set of tariffs imaginable, then it would exert upward pressure on prices – but probably just once. And the Fed has said in the past it’s probably best to look through the one-off effect rather than crash the economy by hiking. Asked about this, Powell repeated that it was too soon to say how the Fed would address potential policy changes, though he did allow that, "we’re in a different situation" today versus six years ago, when inflation had been low and anchored inflation expectations hadn't been meaningfully tested. This is an important point- not only might tariffs be an order of magnitude greater than last time, but the inflation paradigm has changed from ‘we cannot get any inflation’ to ‘2% is now the floor’. These are tariffs after the toothpaste is out of the tube.

The other key plank of the Trump agenda, deregulation, though could be very deflationary by reducing the cost of business. And then you have DOGE – am kinda torn between thinking this is a serious attempt to reduce wasteful spending and reduce the deficit, and thinking it’s a department to count the moon to keep Elon occupied…but if you assume that Musk will do to the government what he did to Twitter, then there is half a of chance of slimming costs. 

Global Market Shifts: Investor Moves, BoJ Speculation & Dollar Surge

Elsewhere…Bloomberg reports Tepper and Burry have signalled the end of their ‘buy everything China’ trade, whilst Buffett’s Berkshire Hathaway sold $36bn of stocks and purchased just $1.5bn in the third quarter, taking net equity selling to $127bn YTD. Meanwhile, it’s Nvidia earnings next week.

BoJ governor Ueda is giving a speech on Monday in a previously unscheduled event- markets looking for signs of whether the central bank will raise rates next month. Current market pricing 53% for a hike vs 44% a week before. USDJPY jumped on the hawkish turn by Powell, JGB yields pushed up on bets that the weak yen will push the BOJ to hike.

In FX, the dollar keeps going, with DXY futs matching its best in a year and almost its best in 2 years at 107. 

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