Fed sees smaller rate hikes coming & the cost of Thanksgiving!

Transcript:
In this week’s episode, we discussed the latest FMC minutes, the underperformance of the UK and the volatility in the oil market along with the COVID situation in China.

The cost of Thanksgiving

It has been a holiday-impacted week in the US because of Thanksgiving. Let’s start off with the costs of hosting a Thanksgiving lunch this year because turkey prices have gone up on a year on year basis. So turkey prices are up 24%. If you want to make your mashed potatoes, it's going to cost you about 20% more than it did this time last year. If you're one of those people that can't eat your turkey without a bit of cranberry sauce, then that's going to cost you an extra 18% as well. The meal in itself is going to cost shoppers, on average about 13.5% more. Eggs were up 74.7% and Buster was up 38.5%. So why are eggs so expensive right now? Well, egg laying hens have been impacted very heavily by the avian flu, driving egg prices through the roof. So Thanksgiving has been a little mor expensive this time but we hope you enjoyed the holiday.

Latest FMC minutes

For anyone relatively new to markets, the minutes are basically a line by line accounts of the discussions of which the Federal Open Market Committee. So the decision-makers at the US Central Bank and the Federal Reserve have over a two-day period for them to then determine what they're going to do with monetary policy when they meet eight times a year. Now, one thing about the US, and very similar to the European Central Bank, is that the minutes normally have like a two week lag. They come out and are published after the actual event in itself has happened; I.e the rate decision. The one central bank in the Western world that's a little bit different is the bank of England, which simultaneously release their outcome of their deliberations on policy so they announced interest rates and QE and so forth, but they also dropped their minutes. The Fed and ECB have a bit of a delay now.

So why is there a difference between the approach of the central banks? Well, it's really down to how they feel is best. From a communication strategy point of view, the bank of England feels as though it's better to just put all the information on the table up front and so that the market has full transparency of the latest thinking that the bank has. Some of those other central banks have actually talked about, although this hasn't happened, about moving the minutes onto a similar format to the bank of England because if you think about it, a lot can happen in financial markets in two weeks, rendering them a fortnight old set of minutes redundant.

So what were the main takeaways from the midweek release of the Fed minutes? While the headline was that most Fed officials seek to slow the pace of interest rate hikes soon, the actual quote from the minutes was that a “substantial majority of participants judged that a slowing in the pace of increases would likely be appropriate soon. While some officials also expressed concern over the impact that rate increases could have on financial stability and the economy”

So overall, those comments didn't really have too much of a media impact. If anything, actually bond and stock prices in the aftermath actually rose simultaneously. Because it's this idea that we are getting more concrete hints towards the Fed pivot. We still got further rate rises to come over the coming meetings. However, the pace of those rises is starting to slow down in terms of the intensity of policy tightening, meaning that we're getting towards the peak now of the interest rate cycle.

So overall, as far as this week is concerned, it's pretty quiet for the second half of the week with the US out, but US equities again looking to put in a pretty decent performance. The Nasdaq is just short of 12,000 now and the SP for the moment Friday morning sitting back above 4000.

The UK Economy

The other things then were the UK and the reason why that's come back into focus is because the UK economy is set to be the worst performer in the G 20 by Russia over the next two years, according to the latest forecasts from the OECD. To put that in context, the only country that's going to be worse economically in terms of growth rates out of the G 20 other than Great Britain is Russia. That's quite a stark statemen of the kind of predicament that we find ourselves here in the UK. Germany is the only other G Seven country forecast to shrink next year by 0.3%, but then will bounce back with a 1.5% growth rate anticipate in 2024. 

So, it's kind of like this move back up that we're likely to see in growth rates after we go into this recession in the near term. The OECD chief economist said that the UK's poor performance was because of a combination of rising interest rates, government action to bring down borrowing and debt, and then the market turbulence during Liz Trust's brief period as Prime Minister.

The state of Oil prices

Oil prices closed a little bit lower at the beginning of the week, but it was a really volatile start to the trading week. Prices originally plunged and then rebounded quite quickly because Saudi Arabia categorically denied the report that OPEC was weighing an increase in output that would help to counteract a loss of Russian crude supplies. 

So basically what happened here was that prices hit their lowest oil prices, their lowest level intraday since the beginning of the year. So literally eleven months ago, after the Wall Street Journal reported that Saudi Arabia and other OPEC producers were discussing a production increase of up to 500,000 barrels a day for when the group meets in Vienna at the next meeting coming on the 4 December. 

Now why are they talking about increasing when we're heading into a recession? Isn't that counterintuitive of what they would want, which is a firmer price? Well, the point is that any decision that they're making timings-wise, an increase in output from the likes of Saudi Arabia leading the charge would come a day before the EU is set to introduce an embargo on Russian oil shipments and plans for G seven countries, then to cap the price of Russian crude. Obviously Saudi denied this, 

but more often than not there's no smoke without fire. It’s not surprising to know that Saudi Arabia lead the movement of OPEC related nations, to increase supply a little bit when those price caps do come in on Russia.

COVID Situation in China

China has recorded its highest number of daily COVID cases since the pandemic begun despite stringent measures designed to eliminate the virus. So several major cities, including the capital, Beijing, the southern trade hub of Guangzhouo, have experienced outbreaks. This is keeping traders on watch on the impact of potential supply chain disruptions. 

However, as much as there has been a little bit of eye on the iPhone production facilities of Foxconn for Apple where there's been lots of unrest there. Otherwise it's then about the overall consumption for crude or if they do go into full lockdown, given the broader context of the recessionary environment we're about to experience globally at this present point in time.