There is not a lot to report from the pre-Christmas week. GDP in the UK for Q3 was revised to -0.1% whilst Q2 is now estimated to have been flat. As a result, output is now thought to be 1.4% above its pre-pandemic level in Q4 2019, compared to 1.8% previously.
Consumer spending fell, although household disposable income is shown to have grown, with the UK savings rate rising to 10.1%. Business investment remained under pressure, although it is not clear how much investment was previously pulled forward ahead of the expected expiry of the super-deduction tax break in 2024. In big picture terms the data does not change outlooks. Whether we go into recession or not, the growth picture for the UK, and indeed the euro area, remains subdued. A return to long-term growth rates nearer 2% will remain a pipe dream.
Last week saw Federal Reserve speakers trying to challenge the market’s view of the path for US interest rates. Investors, however, preferred to look at underlying core inflation which is now running around 2%, meaning that over the next 12 months 1.75% of rate cuts are now priced into curves. US 10-year yields dipped, ending last week at 3.9%, a far cry from the 5% seen in mid-October. A similar pattern was evident in other markets. UK 10-year rates closed around 3.5% whilst German 10-year yields edged below 2% for the first time this year.
Recent inflation data has been better than expected, although oil prices rose due to disrupted tanker passage through the Red Sea. Overall, the impact has not been significant, but it is a reminder that geopolitical issues have the capacity to disrupt the present consensus.
Credit markets have liked the renewed confidence in a soft landing. Low supply and continued demand from annuity buyers pushed sterling investment grade spreads lower whilst high yield markets remained strong. In my view, a bit of caution is appropriate in both markets given the speed of recent moves.
Next year, like all years, will see expectations confounded. That is what makes markets exciting. Happy New Year.
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