What happened last week?
- Inflation was milder than economists had predicted in October, and that put a spring in investors’ steps.
- Quarterly updates from Home Depot, Target, and Walmart were mixed, but not bad.
- US retail sales for October were stronger than expected.
- Fresh UK data showed that employment held steady in the third quarter, while workers’ pay climbed.
- Meanwhile, the UK’s inflation rate in October dropped further than expected.
- British retail sales data last month surprisingly fell.
- Socialist Party leader Pedro Sanchez was sworn in as Spain’s prime minister.
- Japan’s economy shrank by more than expected in the third quarter.
- Chinese retail sales, meanwhile, grew faster than expected in October.
- Ecommerce and cloud computing giant Alibaba’s earnings offered little to cheer about.
What does all this mean?
US inflation came in lower than economists expected in October, and given the economy is holding up pretty well, that got investors believing the country just might achieve the seemingly impossible “soft landing” – cooling ultra-hot inflation with higher interest rates without causing a recession. This new optimism helped give stocks a boost.
Home Depot’s third-quarter earnings were lower than the same time last year, but they weren’t as disastrous as investors feared, which helped the stock initially rise. Target and Walmart exceeded investors’ modest expectations too. But all three big-box mavens delivered cautious outlooks and that may leave the whole sector feeling dour, despite the better-than-expected US retail sales data for October.
In the UK, data showed that workers’ wages grew in “real terms” last quarter. In other words, even after you factor in the inflation rate, workers got paid a bit more than they did at the same time last year. Throw in October inflation data that showed a bigger-than-expected easing in price hikes, and it was a surprise to investors and economists alike that shoppers didn't take advantage. Instead, retail sales data showed that the volume of products bought in October dropped from the month before, confounding forecasts of an increase.
Over in Spain, Socialist Party leader Pedro Sanchez was sworn in as prime minister after reaching a deal with Catalan separatists. After weeks of political uncertainty, having a working government in Spain paves the way for finalising the “Gibexit” border treaty.
Japan’s third-quarter economic growth fell short of expectations and that was a disappointment for investors, sure. But it didn’t appear to discourage Warren Buffett’s Berkshire Hathaway. The global investment conglomerate sold yen-denominated bonds in the country for the second time this year. The move will give the firm more money to plough into its recent Japanese stock bets and all but eliminate the currency risk involved, too.
Retail sales in China grew more quickly than expected in October and so did industrial production, with both helping to partially offset weakness in the country’s real estate sector. But Alibaba’s quarterly results were a wet blanket. The company didn’t just miss its targets: it also announced it would shelve plans to spin off its cloud business, blaming ongoing geopolitical tensions between the US and China.
This week's focus: What goes up doesn’t always come down.
Inflation “cooling” is good news, sure, but day to day, the benefits can be pretty hard to see. After all, inflation measures the rate at which prices are increasing. So, yes, it’s ideal that they’re not increasing at a rate of knots, but unless they’re falling, consumers still have to contend with elevated prices, leaving them with tightened budgets.
Earlier this year, that might not have seemed too pressing an issue: US consumers, for instance, still had ample savings left over from the pandemic period. But as the year has worn on, most people have exhausted those reserves and now their ability to keep on spending looks less certain. Focus in the UK could increase on the high wage growth figures we saw last week. This has the potential to throw a spanner in the works for the Bank of England.
The UK Chancellor of the Exchequer, Jeremy Hunt, will present his Autumn Budget on Wednesday. He is expected to introduce some minor tax cuts to help stimulate growth in the UK economy after the barrage of interest rate increases we have seen for the last two years.
This could be a bigger worry than people realise. The latest inflation figures suggest the US can deliver a soft landing, but a big bump in the road could be the financial health of the country’s consumers. With private consumption representing almost 70% of the US economy, how Main Street’s Mike and May manage their pocketbooks could be the difference between running directly into a recession and avoiding one.
And there would be economic ripples the world over: when the US sneezes, the world catches a cold. So even though investment bank Goldman Sachs sees only a 15% chance of a US recession in the next year, and expects the key US stock market to end 2024 some 5% higher, it’s worth keeping a close eye on consumer spending as we head into Christmas.
The week ahead
- Monday: Earnings: Zoom.
- Tuesday: Minutes of the Fed’s latest meeting, US existing home sales (October). Earnings: Nvidia, Baidu.
- Wednesday: UK Autumn Budget, US durable goods orders (October), eurozone consumer confidence (November). Earnings: Deere.
- Thursday: Japan inflation (October), eurozone and UK PMIs (November), minutes of the ECB’s latest meeting.
- Friday: US PMI (November).
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