Tuesday 13th September 2022 |
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Global
US markets pushed higher overnight as investors await the CPI print due out on Tuesday. Investors expect inflation to have cooled further and this is also the view of consumers according to a survey from the Federal Reserve Bank of New York. Just like Covid, inflation would appear to be declining in intensity. The Dow Jones rallied over 200 points while the S&P500 gained 1.1% and the Nasdaq rose 1.3%. Apple rose nearly 4% on reports of strong demand for the iPhone14.
The Consumer Price Index print tonight is expected to see inflation cool to 8% in August from 8.5% in July. Falling fuel/oil prices are set to be a key instigator of weakness, but inflation is softening in other areas including food and other commodities. The fact that supply chains are also freeing up will also be helpful.
This is all feeding through to the mindset of US consumers, who have moderated their expectations of inflation over the next 12 months to 5.7%, down from 6.2% in July. On a 3-year view, expectations have fallen to 2.8% from 3.2%. Consumers are optimistic around the notion that petrol and house prices, two big drives of inflation during the pandemic, will not increase significantly in the year ahead. Fortunately, Americans are not as exposed to the soaring price of gas as is the case across the Atlantic in Europe.
House prices, like many other places around the world, surged during the pandemic. Expectations for house price growth are now the lowest since July 2020, with rising mortgage rates taking the heat out of the equation. While falling house prices might be seen as dampening the mood, this doesn’t appear to be the case. Perhaps Americans are less hung up on marking-to-market the value of their homes every five minutes as we do in New Zealand!
Overall, American’s perceptions of their household’s current financial situation compared to a year ago has improved. It is amazing what a little easing of intense inflationary pressures will do.
Over in Europe and the UK, cost of living pressures remain elevated, and this is impacting spending power. The UK economy returned to growth in July, after a decline of 0.6% in June, but the expansion of 0.2% was some way less than the 0.5% expected. The UK services sector was the main driver of the rise, while production and construction contracted for the second month in a row. The tepid growth means that the UK economy is just 1% above its pre-Covid level in February 2020.
While the Queen’s funeral is a huge deal, and the first state funeral since that of Winston Churchill in 1965 (Princess Di was not afforded one), it will not come without some cost to the economy. It is estimated that the public holiday to mark the occasion will shave 0.2% off UK GDP. Tourism and hospitality industries will largely be closed, and not get the boost that they did during the Jubilee.
There is however better news in the UK’s efforts to avoid a technical recession. Consumers should be at least in better shape than they otherwise would be with the government capping energy prices. Liz Truss is also set to reverse a hike in the National Insurance put through in April. Plans to increase the corporate tax rate from 19% to 25% next year are also likely to be put on ice.
Another economy set to grow this year despite surging gas prices is Germany. The IFO Institute has though reduced its forecast to 1.6% from 2.5%. Europe’s largest economy is expected to contract 0.3% in 2023, as inflation is expected to hit 9.3%. The European indices however appeared more upbeat about the global trend for lower inflation. The German Dax surged 2.4% and the STOXX600 rallied 1.8%.
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