Morning Update
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The market went on a buying spree at the tail end of last week, as US inflation finally printed below expectations. The 0.3% lower than expected number left inflation for the month of October at 7.7% and that was enough to see stock markets up by more than 5% and the US dollar lower by more than 3.5%. From our perspective, the market seems to have over-bought the good news and, as the Fed pointed out; 7.7% inflation is enormous and this doesn’t mean a shift in policy, although the terminal interest rate may be a little lower than the 5%+ the market was thinking about this time last week.
One asset class that didn’t fare well was cryptocurrency, following the collapse of the second largest exchange, FTX. The company faced a run on its reserves after investors became nervous over the state of its financials and that led to the firm running out of cash and being unable to get a deal done with the largest exchange, Binance – who said they’d looked at the business and didn’t have the power to save it. The collapse of the firm led bitcoin to trade lower by more than 12%, but this morning it has seen a bit of a rebound. Other crypto exchanges are now rushing to try and get out a load of data to prove that they are in a place of financial good standing, so as to avoid the same run on their businesses that FTX suffered. The FT has the story (and we’d expect Netflix to have the movie/series out by the end of next year)
Other news from the US was that the Democrats have clung onto the Senate. A win in Nevada got them over the line and even with a runoff in Georgia next month, the Democrats will, at worst case, have a majority thanks to the vice president having a decision-making vote in the event of any tied votes. The numbers are still being counted in the House of representatives and though it is likely the Republicans will still take a majority, it’s not going to be a big majority and that will be bad news for Donald Trump, who was hoping the first thing that would be thrown out would be the Capitol riots investigation that is underway and that he has been delaying giving testimony to. The first, post mid-term, task will be to get the US debt ceiling lifted (again) and Nancy Pelosi hopes that this can be done between now and the new Congress is seated in January (i.e. whilst the Democrats still have full control) The debt ceiling of $31.4 trillion isn’t likely to get hit until next year, despite US debt currently sitting at $31.2 trillion,?but to make a move to get it done now would mean less horse-trading between the parties when the matter becomes more urgent further down the line.
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Joe Biden will meet with other world leaders at the G20 in Bali this week, most notably Xi Jinping.?Despite being in the White House for a couple of years, Biden hasn’t been able to meet face to face with the Chinese premier, as he has barely seen anyone outside of China since covid. The meeting comes amid the slow decline in Chinese-US relations, that wasn’t really reset after Trump left office (because Biden has really doubled down on a lot of areas of concern and Nancy Pelosi visited Taiwan earlier this year). Xi Jinping comes into the meeting having just secured his third term as head of the Chinese Communist Party, the first to do so since Mao Zedong, so he will feel that he sits in a position of power and will likely want to leverage him taking a tougher stance on Russia with getting some concessions on trade and technology in return.?President Putin won’t be at the meeting, so it will be much easier for Xi Jinping to avoid awkward photo opportunities, but western leaders will want something more than just silence on the matter from Russia’s biggest ally.
?In the UK: This week we get to hear from the Chancellor about just how far he will go against his party’s 2019 manifesto to not raise taxes. On Thursday Jeremy Hunt will give his economic update where he has said spending cuts and tax rises are a must, but that he will try and protect the most vulnerable and be balanced about public service cuts. Doing the rounds on the Sunday sofas yesterday, Hunt set the tone for what is to come by saying his number one priority is to help the Bank of England bring down inflation – and in doing so he would give certainty to businesses and families that there is a plan and that should then give some confidence to them that they can go and spend – and to do that he will raise taxes! The other unknown is how much support will be given to energy prices beyond April next year; with the current cap costing ￡60bn to subsidise, the chancellor is clear that this can’t continue, as it’s basically the same cost as the NHS.
Other items to focus on this week include UK unemployment, inflation numbers and UK retail sales. House price data has already come in this morning and shows that prices have cooled by more than 1% over the last month – we’d expect this to continue as the mortgage market chaos of October really kicks in.