2023 – Week 41

Markets’ overview:

Despite the distressing news emanating from the Middle East, the financial markets have remained remarkably unfazed. Equity indexes around the world have largely displayed positive trends, with the #S&P500 closing the previous week in the green by 0.45%. This marks the second consecutive week of positive gains for the index. While the #NASDAQ was the sole index among our usual monitoring targets to experience a slight decline of -0.18%, it had previously enjoyed a robust week, surging by 1.60%.

In Europe, the #Stoxx600 demonstrated a weekly performance just shy of 1%, while the Asian markets stole the show. The #Nikkei Index concluded the week with an impressive surge of 4.06%, while the #HangSeng followed suit with a solid 1.67% increase.

Shifting our focus to market sentiment indicators, the #VIX, often referred to as the "fear index," rose from 17.45 to 19.32, signifying a notable increase of 10.72%. Concurrently, the #SKEW index experienced a similar upward movement, climbing from 129.6 to 144.3, reflecting an 11.55% rise.

Before delving into the macroeconomic data released during the past week, let's highlight a few noteworthy publications. First, the #OPEC now predicts that global oil demand will reach 116 million barrels per day (bpd) by 2024, a staggering increase of approximately 6 million barrels from their forecast a year ago. This projection stands in stark contrast to the International Energy Agency's (IEA) belief that the world is entering the "beginning of the end" of the fossil fuel era.

In a significant development, the International Monetary Fund (IMF) has raised its global inflation forecast for 2024 and urged central banks to maintain tight policies until there is a sustainable reduction in price pressures. The #IMF now projects consumer price inflation to reach 5.8% next year, up from 5.2% three months ago. Furthermore, the majority of countries are expected to experience inflation rates above their central bank targets until 2025.

While the IMF left its forecast for global real GDP growth in 2023 unchanged at 3.0%, it revised down its projection for the following year to 2.9%. This adjustment reflects a slower and uneven recovery in China and the Eurozone, offsetting the strength observed in the United States.

The unfolding Israel-Hamas conflict is adding a fresh element of risk, the market will keenly observe how global forecasters adjust their future economic expectations.

US

The NFIB's small business optimism index, a crucial indicator of the performance of small and medium-sized enterprises (SMEs) that form the backbone of the US economy, has declined to a four-month low. Rising financing costs are taking a toll on the real economy, with the interest rate on short-term loans reaching its highest level since December 2006 at 9.8%. Credit availability, which had shown signs of improvement recently, has sharply declined, reaching levels reminiscent of the regional bank crisis.

After experiencing twelve consecutive months of year-over-year declines, producer prices have now stabilized and begun to rise over the past three months. This, coupled with the persistence of core consumer prices, has prompted investors to contemplate the possibility of inflation making a comeback.

In September, the headline producer price index (#PPI) increased by 0.5% on a monthly basis and 2.2% compared to the previous year. Excluding food and energy, the core PPI rose by 0.3% on a monthly basis, primarily driven by the services sector, resulting in a larger-than-expected increase.

While US core inflation remained in line with expectations, headline measures surpassed consensus forecasts. Specifically, core consumer price index (CPI) rose by 0.3% in September, bringing the annual inflation rate to 4.1%, while the headline CPI increased by 0.4% and 3.7% respectively.

Coupled with relatively low weekly jobless claims, which totaled 209,000, these developments are putting upward pressure on market yields.

Analytically, these trends serve as a reminder of the challenges faced in the final stage of combating inflation, especially when core service inflation remains a concern and there are worries about the spillover effects of higher energy prices on core CPI. Core prices continue to decline, albeit at a slower pace each month. Ultimately, the market's reaction has been muted as it does not believe this report will significantly alter the Fed's recent hawkish stance.

Investors hoping for additional insights from the September FOMC Minutes were left disappointed, as the Federal Reserve echoed its recent actions. The central bank remains data-dependent and has not ruled out the possibility of another rate hike until it is fully convinced that inflation has been tamed.

The preliminary October University of Michigan consumer sentiment survey revealed a significant drop in respondents' outlook on current economic conditions and their expectations for the next six months.

The third-quarter earnings season kicked off with several banks already reporting. While retail banking profits experienced a 36% year-over-year jump, corporate and investment banking saw a decline of 12% due to sluggish deal flow. Notably, bank managements expressed caution, warning of a gradual decline in the health and economic outlook of US consumers. Despite the industry benefiting from higher interest rates overall, it recognizes the impact that increased capital costs have on consumers and the broader economy. Therefore, as various risks emerge towards the end of the year, banks are exercising greater prudence.

Europe

In August, German industrial output continued its decline for the fourth consecutive month, indicating ongoing pressure on the sector and fuelling concerns about a potential recession. The 0.2% contraction in industrial production was slightly higher than expected, as analysts had predicted a 0.1% decline. This downward trend reflects the challenges faced by German industries, including manufacturing and production, which play a crucial role in the country's economy.

Furthermore, German inflation in September reached its lowest rate since the outbreak of the war in Ukraine, confirming earlier estimates. The consumer price index (CPI) slowed to 4.5% on a year-on-year basis, a significant drop from the 6.1% recorded in August. This decrease in inflation suggests a moderation in price pressures within the German economy.

However, despite the overall decline in inflation, there are indications of rising food prices. Compared to the previous month, food prices have increased by 0.4%, potentially signalling a reversal in the downward trend. This development raises concerns about the sustainability of lower inflation and the potential impact on consumers' purchasing power.

The combination of weakening industrial output and fluctuating inflation levels underscores the challenges faced by the German economy. These factors contribute to an uncertain economic outlook and may have implications for business confidence, investment decisions, and overall economic growth in Germany.

China

China's consumer prices remained flat in September, indicating a sluggish post-Covid recovery in the country's second-largest economy. Factory gate prices also showed a slowdown in annual declines for the third consecutive month. These trends highlight the uneven nature of China's economic recovery, potentially necessitating further policy support.

According to the National Bureau of Statistics, the consumer price index (CPI) in September was unchanged on an annual basis, falling below the median estimate of a 0.2% increase in a Reuters poll. In August, CPI saw a slight uptick of 0.1% year-on-year, marking the first increase in three months.

However, core inflation, which excludes energy and food prices, rose by 0.8% in September compared to the previous year, a similar rate of increase to that recorded in August, as reported by the bureau.

Meanwhile, China's producer price index (PPI) experienced a 2.5% year-on-year decline in September, slightly weaker than the expected 2.4% drop. Despite the decrease, it was the smallest decline in factory prices seen in seven months. Notably, this marks the 12th consecutive monthly drop in annualized PPI.

These tepid price movements reflect the challenges faced by China's economy in its recovery from the Covid-19 pandemic. China stands out as an outlier among major economies, as most continue to grapple with persistently high inflation levels. The latest inflation data may reignite concerns about the possibility of deflation in China. Despite a narrowing decline in producer prices in September, the ongoing annualized drop suggests ongoing deflationary pressures in the economy.

Definition

NFIB's small business optimism index

The NFIB's Small Business Optimism Index is a prominent economic indicator that measures the sentiment and outlook of small business owners in the United States. The index is published monthly by the National Federation of Independent Business (NFIB), a leading advocacy organization representing small businesses.

The Small Business Optimism Index serves as a barometer of small business owners' confidence and their perception of the business environment. It provides insights into their sentiments regarding current business conditions, as well as their expectations for future growth and economic prospects.

A higher index value indicates greater optimism and positive sentiment among small business owners, while a lower value reflects lower confidence and potentially more cautious behavior.

The NFIB's Small Business Optimism Index is closely monitored by economists, policymakers, and market participants as it offers valuable insights into the health and vitality of the small business sector, which is a significant driver of job creation and economic growth in the United States.

Upcoming events:

• October 17: US Retail and Core Retail Sales (September), China Fixed Asset Investment (September), China GDP Q3, China Industrial Production (September)
• October 18: EU CPI & Core CPI (September), US Building Permits (September)???????
• October 19: US Initial Jobless Claims, Philadelphia Fed Manufacturing Index (October), US Existing Home Sales (September), PBoC Loan Prime Rate
• October 20: German PPI (September)