The risks of a downturn to the outlook for economic growth globally have continued to increase throughout October. some leading indicators now indicating even more severe recessions, especially in the eurozone. On the bright side, the euro zone escaped recession in the third quarter, as consumers’ spending turned out to be more resilient to the effects of inflationary pressures than anticipated.
However inflation pressures continue to grow, as the euro zone HICP growth hit a record-setting high of 10.7 percent in October. Although energy prices were the primary factor driving inflation in H1 2022, the pressures on prices are now more generalized increasing the likelihood that inflation will be fast and turn into a more sustained trend than we had previously thought.
However, US private consumption growth fell short of expectations in the 3rd quarter. GDP growth for Headline was greater than anticipated at 2.6 percent q/q, however it mostly was due to an enormous positive contribution from decreasing imports.
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While the pace of growth is decreasing in the US, the immediate growth outlook is solid in comparison to Europe. The savings accumulated from previous stimulus and the rapid rise in wage inflation continue to boost the overall demand, and in particular the service sector is the main driving force behind growth.
The high demand is continuing to help support rapid inflation and the US Core CPI in September exceeded expectations, and also the Fed’s goal of +0.6 percent m/m.
Economic data has been disappointing in China since the Covid-restrictions were renewed. led to the government’s official NBS PMIs to drop to below 50 in October, which indicates a decline of economic growth.
China’s President Xi Jinping was able to consolidate his position at the CPC Congress in the latter part of October by naming new partners to the permanent committee of the politburo suggesting that a change in economic policies currently in place is unlikely.
While there aren’t any concrete indicators of lessening inflation central banks have provided the first indications that the ‘peak hike rate’ is now attained. Norges Bank, Bank of Canada and the Reserve Bank of Australia have indicated a slower pace of tightening for the coming months as well.
The ECB is scheduled to raise its rates by 50bp during December. Contrary to this, the US Federal Reserve delivered its fourth 75bp increase at around the time of its November 1st hike and we anticipate the policy of hawkishness to persist until the end of the year.
The general market mood has improved in the last few weeks, and the hope of a peak in the rate of interest has been a calming factor for the fears of a recession. Bond yields have fallen from their peak in mid-October because of less real interest rates.
The central banks are in the news, as both survey-based and market-based inflation expectations have shifted up a bit, with the highest increase for the US. The equity markets also rebounded somewhat, but the consistently excessive inflation rate and the imminent risk of slowing growth suggest that volatility will continue to increase towards the winter months.
Tensions over the conflict between Ukraine and Russia remain at a high level, as Russia has responded to Ukraine’s counter-offensive by launching new missile attacks. The spillover effect to wider market conditions has been minimal in the meantime, since gas flows through Russia towards Europe has already dropped to just 10% of the volume pre-crisis.
The prices for gas on the market dropped dramatically at the end of October, when most of European storage capacity had been filled. Prices for futures remain high however, given that the supply outlook is still a bit shaky for the spring of next year, which is when storage reserves will need to be replenished with less Russian natural gas, for the very first time in.