Our Perspective.
From a macroeconomic perspective, coincident indicators continue to point to a soft landing, whilst leading indicators remain in the red. In the US, ISM services data and non-farm payrolls are weakening, whilst wage growth and excess savings continue to slow. Alongside a stagnant housing market and the significant contraction in money supply, we expect both inflation and economic growth expectations to deteriorate in the fourth quarter and into 2024. Rising energy prices however will start to contribute to higher CPI data again.
We’re seeing similar trends in the UK and Europe, although realised inflation in the UK remains stickier. This is in part due to recent Sterling weakness since mid-July, exacerbating import prices in food and core goods and services. As for economic growth, Europe has practically come to a halt. Consumption is stagnating, house prices are in decline in most major economies, and survey data are guiding towards a contraction. Despite a robust labour market, in the face of significantly tighter lending standards and a higher cost of capital, a deterioration in economic activity and a wider recession seems unavoidable.
Japan might be the outlier, and a market we retain significant conviction in. The housing market seems stronger than ever whilst services remain robust. The risks are perhaps a policy error from the BoJ as inflation remains elevated whilst they continue with yield curve control and in QE mode. China on the other hand is more problematic. We remain cautiously optimistic as consumption continues to rebound. Major risks to China are a global recession impacting net-exports and the continued uncertainty arising from a local housing market crisis.
In conclusion, our factor quadrant sets out where we believe we are moving towards in the economic cycle. Today, we expect the market to become more pessimistic on economic growth whilst inflation continues to decline.
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