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Monday Morning Update

Badenoch Signs CPTPP Agreement, though the economic benefits in terms of increasing output are (by the Government's own admission) minimal. This morning, we also look at Chinese growth figures and UK CPI, released later this week.

Badenoch Signs CPTPP Agreement

On Sunday, the UK’s Secretary of State for Business and Trade, Kemi Badenoch signed a deal which will see the UK enter the CPTPP. The CPTPP or Comprehensive and Progressive Agreement for Trans-Pacific Partnership is the world’s third largest free trade zone and includes Japan, Australia, Canada, Chile, Malaysia, Mexico, New Zealand, Singapore and Vietnam. The UK’s accession to the bloc will mean that it reduces tariffs on trade between members, though given that less than 8% of the UK’s exports go to CPTPP countries, many are doubtful about the impact of the deal. The government maintains that 99% of UK goods exports to CPTPP countries will now not be subject to tariffs, including items such as cars, machinery, cheese, gin and whisky. Nevertheless, according to the government’s, joining the CPTPP will add a minuscule 0.08% to the size of the UK’s economy in 10 years.

The joining of the CPTPP comes as the UK tries to secure post-Brexit trading relationships around the world. While the UK is the only European country to join the bloc, the deal comes just weeks after the government failed to secure an Anglo-US trade agreement. Last month for example, though Biden and Sunak shook hands over the “Atlantic Declaration” which seeks to strengthen the country’s economic ties, it merely stood in the place of a comprehensive trade agreement. This comes seven years after Barack Obama warned Britons that the UK would be at the “back of the queue” in any trade deal with the US if the country chose to leave the EU.

Chinese Growth Misses Expectations

This morning, Chinese GDP for Q2 2023 came in softer-than-expected hitting 6.3% on an annualised basis. While this marked a sizable increase from Q1’s figure of 4.5%, it nonetheless missed forecasts of 7.3% meaning that the Chinese economy grew 5.5% over H1 2023. Of course, given the impact of lockdowns over H1 2022, the expansion has to be contextualised especially given the breath and depth of concerns over the health of the Chinese economy.

As we looked at last week, concerns over China’s mid to long term economic performance are continuing to mount with many economists considering the impact of country’s debt-ridden municipal governments, high levels of colleague graduate unemployment (which rose to fresh highs 21.3%), a fragile housing market and demographic pressures.

Today’s print comes as the CCP aims to achieve 5% growth this year, a figure which despite being relatively low in comparison with historic rates, will nonetheless be a challenge this year as the country navigates through delicate economic conditions.

Markets Await Wednesday’s UK CPI Print

This Wednesday will see the release of the latest UK inflation figures, as markets consider the BoE’s next move as they gear up for their rate decision on 3^rd August. Last month, core inflation rose 30bps to 7.1% on an annualised basis as the index hit its highest level since 1992 while headline inflation remained unchanged from April’s figure as it came in 30bps above expectation. With inflation continuing to run hot in the UK, markets further upwardly revised their terminal rate expectations. For example, money markets now pricing in a terminal rate of 6.2% in March 2021 with rates remaining close to this level into Q2.

With rates rising to combat inflation, the average five-year fixed rate mortgage rose above 6% earlier this month, as the average two-year fixed deal is rose just shy of 6.5%. This morning, the Rightmove House Price Index slipped 0.2% on a month-on-month basis, though rose 0.5% when compared against July 2022.

The general market consensus is forecasting a headline print of 8.2% while projecting a core print of 7.1% on an annualised basis.