Week ending 17th November 2023.

Lower inflation rates in the US and UK have injected a fresh wave of optimism among investors. This week, we saw a robust rally in the markets, sparking beliefs that central banks may be hitting the ceiling on interest rates.

It looks like the Fed are now getting to have their cake and eat it, too! On Thursday, US retail sales demonstrated that consumers are feeling the pinch of higher borrowing costs after splurging over the summer, with retail sales dipping by 0.1% in October from a month earlier. While the figure has not slid to the lows that economists predicted – 0.3% – it illustrates that consumer spending is neither gaining momentum nor slipping to a level uncomfortable for continued economic growth– a real sweet spot for the Federal Reserve. The data comes amidst a positive CPI report this month showing that the US is well on its way to hitting their 2% inflation target and statistics showing an encouraging slowing of the labour market.

The US producer price index, which measures prices that businesses pay to suppliers, also fell 0.5% in October, taking price inflation back to pre-pandemic levels. Taken together, the evidence is there that policymakers have done well with their tightening campaign and that they might consider the US to be nearing peak interest rates soon, if they aren’t already.

In political news, the US Senate has passed a temporary spending bill, averting a potential government shutdown. This decisive action, welcomed by President Joe Biden, marks the resolution of the third fiscal standoff in Congress this year.

Biden and Chinese leader Xi Jinping made significant progress in their talks in San Francisco this week. Considering escalating tension in recent times the face-to-face meeting is a positive step forward and the two leaders have stressed the need for clear and direct communication going forward. Both leaders agreed to re-establish military-to-military communications, paving the way for enhanced US-China relations.

Recent data has provided insights into the current state of the UK retail sector, reflecting a notable decline in consumer spending. Sales fell by 2.7% from October 2022, their lowest since February 2021 and greater than the 1.5% decline expected. Cost of living pressures, reduced footfall and poor weather hit shops hard. The decline in retail sales adds to the concerns about the UK economy, which stagnated between July and September this year. The FTSE 100 extended gains, underscoring the optimism that reduced consumer spending will contribute to lowering inflation. This environment, where consumers are influencing businesses to become more competitive in pricing, is likely a welcome development.

Chancellor Jeremy Hunt is expected to address these economic challenges in the upcoming Autumn Statement on 22 November where he will detail the Government’s tax and spending plans.

Meanwhile, in the Eurozone, industrial production slipped by 1.1% in September – a larger drop than previous forecasts of 0.7%. The figure signifies that the region is in production contraction for the 7th consecutive month now. While growth is expected to pick up in 2024, highlighted by President of the European Central Bank Christine Lagarde in one of her recent addresses concerning interest rates, the data perhaps points to slower GDP growth in Q4.

Coming up next week the Federal Reserve will release the minutes from their last policy meeting, and we are expecting US durable goods orders and PMI data from Europe and the US. UK consumer confidence is also due at the end of the week and US markets close on the 23^rd for the Thanksgiving holiday.

Kate Mimnagh, Portfolio Economist