Equities got off to a soft start in Europe as we await the return of US traders to their desks later today. Not much movement at the open with data from China weighing a bit, while on the other hand German inflation figures are arguably helping sentiment.
The World Economic Forum in Davos gets into full swing today with the International Monetary Fund saying growth will bottom out this year and pick up in 2024. Germany’s ZEW economic sentiment report is due soon and later we hear from the Fed’s John Williams and the Empire State manufacturing index. Goldman and Morgan Stanley continue bank earnings on Wall Street later.
UK inflation
Employees are getting paid more. That’s good if you’re a worker, less good if you are a central banker. And truth be told it’s not that good for the worker when inflation is rising faster than your wages and higher wages only exacerbate this situation. UK average earnings rose 6.4 per cent in the three months to the end of November – in the private sector it was 7.4 per cent. Outside of the pandemic, this was the fastest pay increase in 20 years – too bad inflation is at a 40-year high. In real terms, this is still a pay cut: inflation is running in excess of 10 per cent. But it does not help the central bank cause as it leads to more persistent elevated inflation.
Is this a wage price spiral? Not quite, but close enough to warrant attention. Remember the same people who told you inflation would be transitory were telling you there are no signs of a wage price spiral and it’s not something to worry about. Wages at +6 per cent and inflation at +10 per cent is stagflation.
There is also a risk the tight labour market will keep inflation elevated for longer – regular readers will know this is my thesis. Today’s wage and unemployment (3.7 per cent) data do not confound this view.
Best of the rest
Buy side
Fund managers think inflation expectations have peaked but CPI is still seen higher for longer this year, according to the latest Bank of America survey. FMs are the most underweight the US since 2005 and most bullish on eurozone equities in a year; bullish yen bets most since 2007. Overall remain underweight global equities and overweight cash and bonds. Recession fears are at a six-month low and growth optimism at a one-year high.
German inflation
After a decline in wholesale price inflation, Germany’s consumer inflation rate is also cooling. CPI inflation declined to 8.6 per cent in December with month-on-month -0.8 per cent. Consumer prices in Germany rose by 7.9 per cent in 2022 on an annual average compared with 2021. This is unlikely to dissuade the European Central Bank from further sharp rate hikes in Q1.
China growth slows
Zero-Covid policies sent Chinese economic growth to the lowest since the 1970s, except for the 2020 pandemic year. Economic growth cooled to 3 per cent, well below the official target of 5.5 per cent. It was the slowest outside the pandemic since 1976. Meanwhile data showed the Chinese population fell for the first time in decades, marking a sea-change in the structural growth of the world’s second largest economy. You can’t keep building, you will have to drive productivity growth. That will make it harder and harder for China to catch the US.
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Oil: Spot WTI holds the 50-day line now after making a higher low, signalling easing in selling forces.
Neil Wilson is the Chief Market Analyst at Finalto
