Weekly View - Happy Thanksgiving

Just ahead of Thanksgiving this week (and the start of the World Cup), a welter of data releases has been painting a mixed picture of the US economy. October retail sales were better and wholesale inflation lower than forecast, while there was a sizeable drop in the average 30-year mortgage rate last week as markets eye a scaling back of hefty Fed interest rate hikes. But growth in industrial production in the US has been stagnating and we had a downbeat Philly Fed manufacturing survey for this month, while housing sales and starts continue to fall. The rise in retail sales should be taken with a grain of salt, while inversion of parts of the US Treasury (two-year Treasury yields at the end of last week were almost 70 basis points higher than yields on 10-year equivalents, which in turn are similar to yields on 30-year Treasuries) are telling us that a recession is coming as well as a shift in Fed policy.  For this reason, we remain cautious on equities, but increasingly upbeat on short- and medium-duration US Treasuries. Elsewhere, Chinese risk assets have been rebounding strongly on signs the authorities were adapting their ‘zero covid’ policy and moves to stabilise the much-troubled property system.  The long, pre-G10 meeting between Joe Biden and Xi Jinping has also helped cool geopolitical temperatures (for now). Yet the covid news is confused and Chinese economic momentum remains weak, as October retail sales and trade showed.

In Europe, industrial production figures for September were substantially better than expected, while the bellwether wage deal between German trade union IG Metall and employers was fairly reasonable, reducing the risk that inflation is fanned by outsized wage demands. Meanwhile, the announcement that European banks will be paying back just under EUR300 bn of cheap loans to the European Central Bank (ECB). This was somewhat less than expected, but may go some way to alleviating inflation and likewise provides some clarity and stabilisation. The same goals were pursued by the new UK chancellor of the exchequer, Jeremy Hunt, in his sombre Autumn Statement last week. As expected, the Statement was marked by tax hikes and cuts to public spending. But many of the measures are only set to kick in after the next general election—so one wonders whether they will ever be introduced, which in turn places a question mark over UK public finances. This, plus the UK’s poor economic prospects, mean we remain underweight sterling and gilts. 

COP27 ended this weekend with a noteworthy commitment by rich countries to set up a fund to pay for climate-related damage in poorer countries. But the summit failed to make much progress on cuts to fossil-fuel emissions, leaving the summit a half-success. But what is clear is that climate change will increasingly impact asset prices and investment returns in future years.