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Chinese Data Subdues Optimism

Chinese data contracts, UK political infighting and BRC shop price index, Middle Eastern conflict escalates, and a look at today's data.

Markets are starting the last trading day of the month with a little bit of a risk-off theme this morning, as overnight we saw some slightly disappointing numbers from China, where manufacturing PMIs printed at 4.5, which is a slight slip back into contraction, rather than expansion. The Bank of Japan also disappointed markets, as they chose to keep their ultra loose monetary policy in play; there was hope that they’d start to tighten rates, as inflation

there is finally lifting off, but the central bank are concerned that inflation isn’t yet anchored and it could well slip below the 2% target which they are trying to avoid and as such left policies unchanged and the Yen weakened as a result. The Yen is sitting at 150 to the US dollar, a position last seen in 1990,  and a level the market had thought the central bank would intervene at, but so far they seem happy to let this play out.

UK Update

In the UK there’s some political infighting over the attendee list at a UK hosted AI summit that starts in London tomorrow. The Times is reporting that some Foreign Office officials have suggested excluding Binyamin Netanyahu from dialling into the conference as it might overshadow Rishi Sunak. The suggestion was swiftly rebuked by James Cleverly and Israel “are coming”. It’s pretty slim pickings for world leaders attending the conference, as Emmanuel Macron is off to Asia, Olaf Scholz isn’t coming because Rishi hasn’t got round to visiting him in Germany yet and Joe Biden is sending Kamala Harris in his place. The biggest name on the list is definitely Elon Musk, who is apparently going to sit down for a live streamed chat with Rishi Sunak – a win-win for both, as Rishi could do with the exposure and Musk will be looking to erase memories of his disastrous live stream with Ron de Santis earlier in the year. The conference itself is an opportunity for the UK to try and claim a position as a forward thinking regulator of AI technology, and our hope is that the news coverage of the event highlights the scale of the challenge of regulating it and some of the risks that are on the horizon (as well as abundant opportunity). If it doesn’t deliver this, then I’d highly recommend the book “The Coming Wave” by Mustafa Suleyman (founder of Deep Mind) to help anyone interested but struggling to get their head around the scale of it all.

Staying in the UK: the BRC shop price index has shown annual shop inflation slowed to 5.2% from 6.2% last month, it’s lowest reading since August last year. The print was a mixed bag, with food prices still growing at 8.8% a year, while non-food items fell to 3.4%. The BRC also took the opportunity to urge Jeremy Hunt not to increase business rates from next April, which they say (correctly) would risk upward pressure on prices again, as a lot of retailers are already facing narrower margins in a bid to not pass every price rise onto their customers. Other news out was the Lloyds business survey, which shows a slight improvement on sentiment compared to last month and the second most optimistic reading of the year, though the survey did reveal that 62% of firms are planning to increase their prices this year.

Middle Eastern Conflict

Conflict in the Middle East continues to escalate, with Saudi now on high alert following clashes with Houthi rebels in Yemen. They also say that the rebels have tried to fire a missile over Saudi towards Israel. The World Bank have put a report out saying that a worst case scenario for oil prices is that they go to $157 per barrel. To get that high they say that major Middle East producers would have to take 6-8 million barrels of daily production offline. Smaller disruption scenarios see crude ranging from $102-121 per barrel, a significant increase from the $83-ish dollars we are trading at now. European gas prices are feeling the effects though, as they now trade at their highest level since March. Yesterday Egypt said that their gas imports had fallen to zero – down from 800 million cubic feet per day – which means they can’t export to Europe. Their supply to Europe is small, but their announcement is seen as a troubling sign because if other markets experience the same situation then the combined effect will be significant. Gas prices are up 40% this month and saw a jump of 7% yesterday on this announcement. We’re still at around a quarter of the peak price we saw over last winter’s gas crisis, but as we saw then these things can escalate quickly.

Looking To Today

German data will give markets something to think about, as their GDP print is likely to show contraction and their inflation numbers will likely fall slightly but remain above 4% year on year – if they don’t fall but GDP does then that’s a troubling combo. European consumer confidence is also printed later on. Whether the markets take much notice of these numbers remains to be seen, as wider geo-political risks take up most of the market’s thinking.

Have a great day.

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