Friday Nov 17 2023 10:53
4 min
“In the US, we may be managing through a period of deflation in the months to come,” - Walmart CEO Doug McMillon.
And according to the American Farm Bureau Federation, the average cost of a dinner for 10 people will be $61.17, down 4.5% from last year’s record of $64.05. Deflation is being talked about more and more. US CPI inflation was flat month over month, whilst core CPI fell to its lowest in two years.
Meanwhile, the US reported the highest initial claims since August and the highest continuing claims since Nov 2021 … businesses not hiring – not firing that much maybe but not hiring. This is pointing to a slowdown – we wonder when there is a tipping point and the Fed cracks...my bet has been that it won’t crack anything like as earlier as the market maybe thinks, but that can change. The Fed is probably behind the curve on recession risks – that is a given. But does it need to be mindful of inflation still? The question is a matter of premature celebration – if they cut too soon they risk reigniting the inflation flame and not having any credibility to deal with it – a la the 1966-69 period.
So what if unemployment gets worse than expected? Do we revert to the Jun forecast of 4.5% next year vs perhaps the slightly optimistic 4.1% – according to the dots that’s only 50bps difference – enough of a trimming of the fed funds rate to remain as restrictive as we are today? Or as we said in September: Fed officials are predicting higher growth and inflation and rates, for longer. Does this add up?
A full 100bps of cuts by the ECB are seen by the end of 2024...Christine Lagarde is talking today about deglobalisation and fragmentation again – a theme we have explored a lot this year.
Indeed, trade wars are inflationary which is why I still stick to the inflationary paradigm argument. Alibaba has nixed a major restructuring due in part to US chip restrictions, which the group said have “created uncertainties for the prospects of Cloud Intelligence Group.” Shares plunged as the company said it is scrapping plans to spin out its cloud computing division and iced a planned list of grocery chain Freshippo. The cloud business has not been doing great and market conditions have maybe become less favourable – results yesterday missed expectations. And it’s a sign that the US-China trade war is alive and kicking and having an effect – they need chips and can’t get the ones they need. Things have changed a lot since the restructuring was announced. The focus is now on investment – Chairman Tsai saying they need “cash to make investments — because in the AI-driven world, to develop a full-blown business based on a very networked and highly scaled infrastructure, it requires investment”.
Stocks were higher in Europe in early trade Friday after a bit of flat session on Wall Street – all heading for decent weekly gains- Russell 2k +4%, SPX and Nasdaq +3%, DAX +4%, FTSE 100 +1.4%...gilts catching some bid on the weak UK retail sales numbers – all the roads pointing to the Bank of England being ready to cut next year. China’s property market is showing fresh weakness with new housing prices -0.3% in Tier 1 cities, with second hand prices -0.8% (both MoM).