Economic Outlook – 13 November 2022


• There was some clear relief in consumer inflation in October, which is a welcome development for households and policymakers alike. The headline consumer price index rose “just” 0.4% during the month, which was below the Bloomberg consensus expectation for a 0.6% gain and caused the year-ago pace to fall back to 7.7%, or the lowest annual rate of inflation in nine months. Core prices also rose a more muted 0.3% during the month as core goods prices declined 0.4% amid an easing in supply chain constraints, which have boosted retail inventories. Core services prices rose 0.5% during the month, which is still quite fast compared to the pre-pandemic run rate. Overall, October’s moderation in inflation is welcome, but with the core CPI up at an annualized rate of 5.8% between July and October, there remains a long way to go before inflation returns to a rate the Fed will tolerate. The way back down to the Committee’s 2% inflation goal will also likely be bumpy with services inflation particularly difficult to stomp out. The October CPI report reduced the likelihood of another 75 bps rate hike in December, but policymakers are expected to remain biased toward over-tightening rather than under-tightening for the foreseeable future

• As Fed Chair Powell noted recently, the Fed has reached a point where it will dial back the pace of rate hikes, but there’s quite a bit more to be done in raising rates. Underpinning this hawkish tilt is the broad resilience in the labor market. Job openings for instance, have eased a bit, but remain plentiful – a message echoed by the NFIB small business survey

• Still, cracks continue to form in some corners of the economy, case in point the tech sector. Layoffs at Meta and Redfin (online real estate broker) amounting to 13% of their workforces added to the string of cuts announced in the tech space this year. Meanwhile, the higher interest environment is expected to continue weighing on the housing market, with weak prints likely to follow in next week’s housing starts and existing home sales reports. Bringing inflation down comes at a cost

• The major indexes recorded strong gains as investors celebrated reassuring inflation data and bond yields fell. The S&P 500 Index recorded its best week since June and hit its best intraday level in two months. After the release of consumer inflation data on Thursday, the index recorded its largest daily gain since April 2020. Growth stocks—technology and internet-related shares, in particular—benefited the most from falling yields, which typically increase the perceived value of future profits. An index of nonprofitable tech stocks—where a large share of revenues is presumably being invested in future growth—jumped over 15% on Thursday

• Most of the rest of the week’s economic data were largely in line with consensus expectations. The notable exception was the Friday morning release of the University of Michigan’s preliminary gauge of November consumer sentiment, which fell unexpectedly to its lowest level since July. The survey’s lead researcher attributed the drop in part to poor buying conditions for durables given high prices and interest rates

• A study published by the Federal Reserve Bank of San Francisco says that a proxy that incorporates data from financial markets indicates that US financial conditions are about 200 basis points tighter than the current level of the fed funds rate, which is just below 4%

• In terms of data release, retails sales print is out on Wednesday. Retail sales were flat in September, coming off of an upwardly-revised 0.4% increase in August. A 1.4% decline at gasoline stations and a 0.4% slip at auto & parts dealers weighed on total sales, offsetting rises at department stores and e-commerce retailers. Adjusting for inflation, real retail sales might have risen up tp 0.3% in September and sit about 8.5% higher than its pre-pandemic level. In short, consumers continue to spend despite elevated inflation

• Industrial production is also out on Wednesday. Industrial production regained footing in September, rising 0.4% off of a 0.1% decline the prior month. Manufacturing (0.4%) and mining (0.6%) rose over the month, while utilities declined 0.3%. Strength in manufacturing was broad-based, with producers across the durable and nondurable sectors posting monthly gains. Meanwhile, capacity utilization rose to 80.3%, the highest level since 2008. September’s utilization rate marks the fifth above-80% reading this year—an impressive feat, given the 76% average over the past 15 years

• Housing Starts & Existing Home Sales are out on Thursday and Friday. The housing market has buckled under the weight of higher mortgage rates. Elevated home prices, combined with skyrocketing financing costs, have crippled buyer demand. Residential construction has moderated in response, evident in the trend decline in housing starts this year. Starts plummeted 8.1% month-over-month to a 1.439 million-unit annual pace in September. Weakness was broad-based, with single-family (-4.7%) and multifamily (-13.2%) starts declining


• UK GDP for September and Q3 has come out at -0.6% MoM, -0.2% QoQ, 2.4% YoY. While the numbers might be slightly better than anticipated on a quarterly basis, the Monthly and Quarterly data are calculated separately, the overall path remains clear and debate around the impact of the extra holiday for the Queen’s funeral does not alter that course. The signs of a slowdown have been apparent for some time, Consumer Confidence has been languishing at all-time lows and even business confidence, which remains more positive, has moved into negative territory. The upcoming budget on November 17, is key to determining the scale and scope of the downturn. It is now certain a recession is happening thus the wisdom of hiking taxes and curtailing spending is going to be tested. There had been a question as to whether people would lower their savings to cope with higher costs of living or lower their spending and increase their savings in the coming months. The data on deposits from the Bank of England clearly shows that caution has been the preferred course, while data releases show that real household expenditure fell by -0.5% in Q3

• The service sector fell by 0.8% in September and was the main driver of the fall in overall GDP. Information and communication fell by 3.2% in September, much of this being down to falls in computer programming activities which fell by 3.9%. The second-largest negative contribution within services came from wholesale and retail trade, which fell by 2.0% in September. Wholesale and retail trade fell by 3.3%, with the Society of Motor Manufacturers and Traders reporting new registrations were only 4.6% above last September, which was the weakest since 1998. Clearly, consumers are focusing on essentials and work-related spending while pulling back from buying more expensive durable goods

• UK finance minister Jeremy Hunt said, after the release of the data, that tough decisions would need to be made on tax and spending in the November 17 budget. The Financial Times newspaper reported that Hunt is planning a three-year freeze in state spending after the next general election that could halve an estimated fiscal shortfall of GBP 55 billion

• The British government plans to reduce a surcharge on bank profits from 8% to 3% to improve the industry’s competitiveness when its corporate tax rate rises from 19% to 25% in April. The tax was put in place after the global financial crisis to help offset the costs of government bailouts

• BoE Governor Andrew Bailey said in a local newspaper interview that interest rates were likely to rise further in the coming months, although he was hopeful that inflation would peak this winter. He said it could take between 18 months and two years to tame inflation


• The European Commission forecast that the eurozone economy would contract in the final quarter of this year by 0.5% and shrink by a further 0.1% in the first three months of 2023—a technical recession—due mainly to higher energy prices triggered by the war in Ukraine. Economic growth in 2023 is predicted to slow to 0.3% from 3.2% this year. The commission also raised its forecast for inflation to 8.5% this year, 6.1% next year, and 2.6% in 2024

• After a string of soft German economic data for September, industrial production surprised on the upside, rising by 0.6%, sequentially. However, the drop in August was revised lower to 1.2%, largely due to logistics problems caused by low river levels and surging energy prices

• Shares in Europe rose on slowing inflation in the U.S. Better-than-expected results this earnings season also appeared to lift investor sentiment, although the economic backdrop remains challenging. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.66% higher, while Germany’s DAX Index surged 5.68%, Italy’s FTSE MIB Index climbed 5.04%, and France’s CAC 40 Index advanced 2.78%


• The week’s economic reports were limited but demonstrated the toll that lockdowns and slowing global demand have taken on China’s economy. Exports fell 0.3% in October, well below the 4.3% increase that analysts polled by Reuters had predicted and the first drop since early in the pandemic. Imports also fell 0.7% as weakening domestic demand compensated for increases in purchases of most commodities.

• In a hopeful sign of easing global inflationary pressures, Chinese producer prices fell 1.3% in October, their first decline in nearly two years. Global shipping costs have also plummeted over the past year, with container rates for shipments from the Far East to the U.S. West Coast falling nearly 88% since March, according to freight analytics firm Xeneta

• China’s exports shrank in October for the first time since early in the pandemic. Imports slumped as well amid slowing domestic demand on the back of renewed COVID restrictions in multiple parts of the country as cases rose to their highest levels since mid-April. China’s new Politburo Standing Committee urged local leaders to be more targeted in their COVID restrictions so as to avoid damage to the economy. On Friday, a 20-point playbook that slightly eases restrictions was released

• Shares in China received a late boost from the surprise drop in U.S. inflation but trailed most other global markets as investors worried about new signs of economic fragility. The Shanghai Composite Index returned 0.54% for the week. News of additional support for the troubled housing market helped provide some relief to property stocks. Chinese officials ordered second-tier banks to extend another USD 56 billion in loans to developers, according to Bloomberg

Sources: T. Rowe Price, Handelsbanken Capital Markets, MFS Investments, Wells Fargo, TD Economics, M. Cassar Derjavets