I have never really embraced Black Friday or Halloween. Both have become more important over the years as American tastes and celebrations have been adopted more universally. Black Friday appears to me to be a bit of a con.
Prices seem to be reduced but only to levels that a savvy shopper could achieve at other times. Here, the internet really makes a difference: customers are provided with a welter of data, making comparisons pretty easy. And it is clear that inflation is not universal. I certainly notice the difference in food and energy prices, restaurant bills and transport, for example. But browsing through Black Friday electrical goods offerings show continuing deflation in many consumer items. 50-inch TVs for around £250, cheap laptops, clever washing machines, fitness gadgets – all getting better or cheaper.
News out of the US last week showed a mixed picture. The first indications are that Black Friday sales have been somewhat disappointing with lower footfall and squeezed margins. US business survey evidence was also generally downbeat with the Purchasing Managers’ Index (PMI) composite weaker than expected, falling to 46.3. This is still above the Covid low point but represents a significant decline from the enthusiasm of mid-2021. The fall was driven by deterioration in both services and manufacturing, with businesses citing inflation, rising borrowing costs and economic uncertainty. However, US data supported both equity and bond markets. This possibly reflected the view that US interest rates are approaching a peak and that further tightening will be more modest. US 10-year Treasury yields declined further, moving below 3.7%, a good 50bps below the rate of a month ago. However, looking at what is implied in yield curves there does not appear to be much movement in where the market is pricing in peak rates – a Federal Funds rate of between 4.5% and 5% by mid-2023.
Surprisingly, the Euro area composite PMI rose to 47.8, stronger than expected. There was an interesting read into European businesses with reports that there were fewer supply constraints and some sense of a pick-up in confidence for 2023. In line with the Euro data, the UK PMI also improved a touch to 48.3, defying expectations of a further deterioration. More problematically, the new orders indicator hit its lowest in almost two years. The new Prime Minster and Chancellor seemed to raise the prospect of a more fruitful relationship with the EU, with some press reports suggesting an alignment similar to Switzerland. This seems to have been quickly quashed, with Brexiteers showing determination to carry on with the ‘go it alone’ approach. What this, and other clashes over policy indicate, is that the Prime Minster, despite a large theoretical majority, is more hemmed on policy options than was first thought.
Overall, PMIs were consistent with some easing of inflation pressure and a subdued growth outlook. I am not sure that I would read too much into the UK data. Yes, the UK headline PMI may indicate that the recession may be milder than expected, helped by lower energy prices and easing supply constraints, but we still have to face some significant hits to real disposable income. Sterling bond markets took all this in their stride, with the 10-year gilt yield dipping below 3% before finishing the week at 3.1%. I still think the supply of government bonds will push up long yields in coming months and it was telling that fresh supply of the 50-year index linked bond had to be accompanied by a significant price concession.
Credit spreads continued to fall with non-gilt indices ending the week below 1.7%, 30bps below their October peak. Supply was generally well received with investors re-investing some tender/buyback proceeds received in recent weeks. A key test will be whether there can be a sustained rally in financial bonds, given on-going supply.
On the commodities front, oil prices took a tumble last week, giving more credence to the view that global inflation is topping out. From a mid-year peak, oil is now 20% lower and this will feed through in time. Weaker growth expectation, signs of dissent in China and positive indications that Europe is handling its energy crisis all worked to send Brent towards $80 a barrel. I feel that the China story needs to be watched and what happens will likely have a big impact on markets in 2023.
I visited Glastonbury on Saturday and came across their Frost Fayre. It was a pretty large event with small businesses showcasing their entrepreneurial flair. It was also interesting to see that Glastonbury has retained its independent spirit, with the high street dominated by local shops rather than the usual chains. Some people were even dressed as Green Men. Halloween may be Americanised now but its roots, like that of Green Men, are long established in many cultures, including Britain.
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