Inflation remains sticky in the UK economy, keeping pressure on the Bank of England to maintain interest rates at a level that is much higher than we’ve been used to for some time.
UK share prices dipped due to higher-than-expected inflation, fuelling concerns that the Bank of England might need to implement further monetary policy tightening. September’s headline consumer price inflation surprisingly remained at 6.7%, intensifying pressure on the Bank of England to keep interest rates high. Although inflation did not fall, it is still considerably lower than its peak of over 11% a year ago. While food price inflation is still relatively high, it has started to recede, dropping from 13.6% in August to 12.2% in September.
A glimmer of hope emerged in the midst of the cost of living crisis as average pay growth surpassed inflation for the first time in almost two years. Regular pay, excluding bonuses, reached 7.8% in the three months leading up to August, which is a slight decrease from the preceding month’s 7.9%. UK unemployment remains low at 4.2% in the three months to August. However, the labour market also appears to be losing steam, with the number of job vacancies falling by 43,000
UK house prices fell by 5.3% in the year to September, according to Nationwide, with falls in every region as interest rates rises continue to squeeze mortgage borrowers. The housing market has slowed in recent months as the Bank of England has raised interest to combat rising inflation triggered by the Covid-19 pandemic and the Russian invasion of Ukraine
US interest rate fears
Despite strong growth from some prominent tech companies, US markets dipped due to concerns that the robust economy might lead to interest rates staying higher for longer. Worries that interest rates will remain high into 2024, along with better-than-expected US economic data, have also triggered a substantial sell-off in the bond market.
The Federal Reserve is banking on higher interest rates to encourage savings, curb business expansion, and cool the economy to alleviate inflationary pressures. Meanwhile, the escalating conflict in the Middle East has led to a surge in crude oil prices, but so far it has had only a limited impact on both stock and bond markets. US inflation was higher-than-expected in September, adding to the strain on consumers. The Consumer Price Index increased by 3.7% over the 12 months ending in September, mirroring the rate seen in August. Core inflation, which excludes volatile food and energy prices, dipped from 4.3% to 4.1%.
The US economy, despite elevated interest rates, remains robust, growing by 4.9% in the three months leading up to September. September also saw the addition of over 336,000 jobs, nearly double the initial estimates. But while job numbers surged, monthly wage growth remained moderate, with average hourly earnings rising 4.2% in the year to September. The headline unemployment rate held firm at 3.8%.
European bonds rally
European government bonds rallied after eurozone inflation dropped to its lowest level in two years in October, providing relief to consumers grappling with rising prices. The annual inflation rate for the region fell from 4.3% in September to 2.9% in October. Core inflation fell 4.2% from 4.5% the previous month. Yet concerns persist that elevated energy and wage costs may keep inflation above the target level.
The European Central Bank (ECB) expressed caution about the continued weakness of the eurozone economy, pausing rate hikes for the first time in over a year. Concerns are mounting about the impact of rate hikes on European economies. There are fears the eurozone could slip into recession, particularly in light of Germany’s economic downturn, where a manufacturing slump led to business activity contracting for the fourth consecutive month in October.
Asian stocks climb
Asian stocks climbed following China’s government unveiling new stimulus measures aimed at revitalising the nation’s strained economy. While China had a stronger-than-anticipated performance in the third quarter, these initiatives are designed to bolster growth next year. Economists foresee a potential slowdown in China’s growth to around 4.5% in 2024, with persistent challenges on the horizon.
The ongoing real estate predicament in China continues to intensify, as house prices recorded their most significant decline in nearly a year in September. Furthermore, China’s largest property developer, Country Garden, has recently joined the list of property giants by defaulting on its overseas debt, further accentuating the property sector’s troubles. Problems in China’s property market is having a huge impact as the sector accounts for a third of the economy.
Exports and imports also fell again compared to a year ago. China’s trade has slumped this year amid falling global demand for Chinese goods caused by interest rate rises. The US also brought forward a ban on the export of high-end artificial intelligence chips to China which was originally planned for mid-November.