Let us look at the positives. We know the new prime minister and Rishi will presumably have a longer shelf-life than a Tesco lettuce. Economic policy will be more orthodox and predictable (for better or for worse) and the job of upsetting the markets will revert to the Bank of England: a task, one suspects, for which they are well skilled. We can move on from the political distractions, fun though they have been, and ‘get on with the job’.
To use gratuitous litotes, the next two weeks are also not without importance. The Bank of England is due to pontificate on the state of the nation on November 3rd, when it will publish its latest forecasts, raise interest rates and update on its plans for quantitative tightening. None of these will make edifying reading. It is possible that prior to this, Chancellor Hunt, assuming that he is still one door down from the PM, will have announced a new Budget. That is also going to be painful. Both, though, are what the markets want to hear. And, as we argued last week, the markets have this unfortunate tendency of getting what they want. It may not be healthy, but that is the way the world currently turns.
I am hugely grateful to Martin Sandhu, economic commentator at the Financial Times, for drawing my attention to a tweet (I loathe Twitter, but that matters not) by Sanna Marin, prime minister of Finland. Strictly speaking this was a retweet from a Finnish academic, but the translation of the message is “There is something seriously wrong with the prevailing ideas of monetary policy when central banks protect their credibility by driving economies into recession”. Indeed. On the day before the Bank of England delivers its ladles of cod liver oil, the Federal Reserve will do the same to the United States. The following week – by which time we are up to November 8th – we have the US midterm elections to look forward to.
Equity markets have been in a much better mood over the past week, especially in the US where the major indices have risen by 5% or more. It is not always easy to pinpoint why and is likely to be no more than laws of averages reasserting themselves. We will, though, probably move quite swiftly into a phase of bad news being good. Markets believe that the Fed is determined to attack inflation by squashing demand; in other words, by dancing with the devil of recession. Thus weak economic data are indicators that the medicine is starting to work. In fact, the worse the data, the closer we get to the time when the Fed pivots. And so it could be that last week’s large fall in what the US calls ‘housing starts’ is a sign that their surging mortgage rates have already affected the housing market. This may be the first anecdote that the house builders are reining back on construction as demand weakens. Perversely, let us hope that it is.
Hopefully readers will be aware that we have argued for some time that the pieces are already in place for inflation to fall through 2023. Higher interest rates are already affecting western economies, as are the inflation rates. In the UK, we have the additional dampers of the fall in the pound and the ripples from the shambles of the Conservative Party. Crucially, the growth in the amount of money (in the US and UK in particular) have slowed to a snail’s pace.
Readers will also hopefully be aware that I spent several years working with Professor Tim Congdon and have been greatly influenced by his work. Thankfully, Tim has lost none of his inimitable gusto, especially when it comes to debunking orthodoxy. He received very little coverage, or credit, for having predicted, in June 2020, that US inflation was likely to reach 10%. By the same analysis of monetary conditions, Tim is now seeing similarities in the US of 1929-33. If that is true, which of course is a very large ‘if’, then the Fed will be forced into the most almighty U-turn at some stage in 2023. Markets will cotton onto this. The question is when, not if.
We should also just touch on Asia. First, we should remind ourselves that while 3% Japanese inflation may be high by their own standards, inflation is not a universal experience. As a very quick tangent, the latest rate for Saudi Arabia is 3.1% (driven by an oil boom, the later ego of an oil crisis). Chinese inflation is even lower, at 2.8%, although markets are concerned by President Xi’s reconfirmation of his zero-covid policy. Xi has become an unsettling figure, and investors cannot shrug off the possibility that he will use military force against Taiwan. Just as they also cannot escape the lingering possibility of the Ukrainian war going nuclear.
Finally, congratulations to all the Kinks’ fans who were untroubled by Waterloo Sunset. Today, who told us about Holly, Candy, Little Jo, Sugar Plum Fairy and Jackie? And for a bonus, what is the link back to the Kinks?
Jim Wood-Smith – Market Commentator and Head of Climate Transition
All charts and data sourced from FactSet
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