This week saw the preliminary release of UK economic growth, or lack of, for the third quarter. Initial figures showed the economy contracted by -0.2%, the first contraction we have seen since the first quarter of 2021. All sectors of the economy stalled/contracted, including services, production and manufacturing. As we reported last week, the Bank of England forecasted that we could be in recession until mid-2024, is this the start? Whilst a contraction was recorded this was lower than the consensus forecast of -0.5%, so whilst negative, perhaps some positives can be taken.

In the US meanwhile weaker than expected inflation data left investors pleasantly surprised. This came out at 7.7% year on year, which was below the consensus forecast of 8%. This was the 4th consecutive month which it has fallen. Core inflation, meanwhile, which excludes food and energy, rose 6.3%. Whilst prices continue to rise, the rate of increase continued to fall across most sectors, including energy, food and used cars. There was a higher rate of inflation however for shelter (rents).

Equities rallied strongly on the news, in particular the recently beaten up technology names, with the Nasdaq for example up 7.35% on the day. One casualty was the US dollar, which saw weakness.

Research conducted by Steno Research and Macrobond shows an uncanny pattern of US inflation from 2018 to today compared to the early 1970’s. What we can see is that during the period of 1972-1984 inflation by no means followed a straight line and there were indeed peaks and troughs. It is too early to say if this pattern will hold true, but as the saying goes, “history doesn’t often repeat, but it does rhyme.”

The weaker than expected inflation data, however, gave rise to a fall in interest rate expectations, as priced by overnight index swaps. A 0.5% hike is now expected in December rather than the 0.75% initially forecast.

Chinese equities meanwhile had a very strong end to the week, with the Hang Seng closing up over 7.74%. This came on the back of the loosening of some of their Covid rules, including shortening quarantines by two days for close contacts of infected people and for inbound travellers, whilst also removing a penalty for airlines bringing in too many cases. Whilst these could be considered very small baby steps, it perhaps illustrates what moves we could see were there to be a further relaxation of further policies in place. Too early to know when this could be but encouraging all the same.

We end the week however on the news that FTX, a cryptocurrency exchange, has filed for bankruptcy protection, after it was unable to meet a torrent of withdrawals. The latter were requested from customers following concerns surrounding its financial health. Just a few months ago FTX was carrying a $32bn valuation and included investment backing from significant blue chip investors, a number of which have subsequently marked their investment down to zero. Is this a sign that liquidity withdrawal is biting a little harder than some expected or was/is there a deeper rooted problem at FTX. Time will tell.

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