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Headaches Remain for Threadneedle Street

Word of the week Wednesday, higher-than-expected UK inflation, worst day in nine months for FTSE 100, and latest data release for Chinese growth.

Word of the Week Wednesday

 

Executive Order: In the US, an executive order is a directive signed by the President which has the same effect as federal law (being entered into the Federal Register) and bypasses the standard legislative process. While Congress can pass a law to override an executive order, the President can veto it. It’s important to consider however that EOs can be adjudicated unlawful. A newly sworn in President will review existing EOs and only they can overturn them by issuing a new one. FDR, signed 3,721 executive orders during his 12 years in office.

 

 

Some examples across history include:

  • Proclamation 95: Lincoln’s Emancipation Proclamation which altered the legal status of more than 3.5 million enslaved African Americans in Confederate states from enslaved to free.
  • Executive Order 13769: Trump temporarily banning citizens of seven Muslim-majority countries, from entering the US including permanent residents.
  • Executive Order 8807: FDR funding the Manhattan Project Executive Order 13228: Bush’s Creation of the Department of Homeland Security in 2001 following the 9/11 attacks.

UK Inflation: Headaches Remain for Threadneedle Street

UK inflation came in higher-than-expected this morning in the latest signal that the Bank of England may need to maintain monetary conditions higher for longer. Figures from the ONS showed the country’s consumer price index falling from 3.4% in February to 3.2% in March, against a market consensus which was forecasting inflation to fall more extensively to 3.1%.

Hence, while today’s headline inflation print marked the lowest since September 2021, the fact that it remained hotter-than-expected and still well above the Bank of England’s 2% target rate signals that Threadneedle Street continue to face headwinds.

Just yesterday for example, Governor Andrew Bailey telegraphed that the UK was on track for rate cuts this year and while money markets are still forecasting this to be the case, following this morning’s inflation print, they have downwardly revised their expectations on the extent to which the BoE will cut,

Perhaps most alarming for policy makers was how the owner occupiers’ housing costs (OOH) component of CPIH rose 30bps from 6% in February to 6.3% in March. Given that this includes owner occupiers’ housing costs and Council Tax – which are excluded from the CPI’s basket of goods – this is often considered a more comprehensive gauge of inflation.

Moreover, core inflation continues to remain elevated with the month of March coming in at 4.2% against a consensus of 4.1%. While this was again a modest deceleration from February’s 4.5% level and May’s all-time highs of 7.1%, it demonstrates that the country is not out of the woods yet when it comes to inflationary pressures.

Attention now turns to the Bank of England’s next monetary policy meeting on 9 May.

FTSE 100 Suffers Worst Session in Nine Months

With markets considering how the Bank of England may see it necessary to hold rates higher for longer, such sentiments fed into the FTSE 100 suffering its worst day in nine months. Rhetoric from Chair Powell which signalled that the Fed may be more hawkish also fed into investor sentiment with his comments coming on the back end of rising unemployment in the UK and increasing geopolitical concern in the Middle East. As such the UK’s blue-chip index sank as much as 1.9% with only a handful of companies closing in the green.

It was a similar story across the channel where France’s CAC index fell 1.4% to end Tuesday’s session at its lowest level in almost seven weeks as Germany’s DAX also sank 1.44%.

Chinese Growth

Yesterday, Chinese growth was again brought sharply into focus with the latest data release indicating the world’s second largest economy grew quicker than expected. On an annualised basis, GDP expanded 5.3% over the first quarter of the year, against market expectations of a 5% print. On a quarterly basis, the Chinese economy grew 1.6% marking the seventh consecutive quarter of expansion. The latest data gives some room for cautious optimism at a period of time when the health of the Chinese economy has been under scrutiny given fragility in its property sector, high levels of youth unemployment and deflationary pressures.

Sticking with China, The Economist has written an article on the ageing demographic makeup of the country. It leads with the incredible stat that if China’s over 60s were to be a country, at just shy of 300m people, it would be the fourth most populous country in the world. Alongside an aging population, the size of China’s population is also falling alongside the size of its workforce. Perhaps most alarming for Beijing is that its fertility rate currently stands at just 1.2 – well below the rate needed to maintain the existing population.

China – which brought in a One-Child Policy in 1979 and maintained it for decades – now faces the prospect of demographic changes causing a major drag on growth. For example, one source cited in the article indicates that all things being equal, the country’s diminishing labour force could over the next ten years “cost one percentage point of GDP growth” per year.

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