Morning Brief – Two defining developments

Charles Porter
Thu 9 Nov 2023

Two defining developments

Both for their respective currencies but also for wider market conditions, recent developments in the UK and Chinese economies will have a significant impact. The two headlines that have recently captured traders’ attention are publications of deflation in China and a push back on declining rate expectations in the UK. Let’s unpack China’s deflation statistics first. 

We know that the Chinese economy has a significant influence not only on the broader regional economy but also on a global scale. Deflation is still a concerning and largely unpalatable feature of an economy even after a period of high inflation. It seems to be the worst economic enemy of consumers, businesses and policy makers. Whilst simple on paper, the implications of disinflation to an economy can be devastating when of sufficient momentum. Data published overnight saw consumer and producer price indices fall for the month of October. China has had a remarkably different experience with inflation versus the rest of the world. Authorities have most recently been attempting to add stimulus rather than constrain activity and thereby the price level. Disinflation is inextricably linked to economic underperformance and such data in China is troubling for global growth expectations. Weakness in regional FX, including the antipodeans, may be a reasonable conclusion in the short run.

Back to the UK where BoE governor Andrew Bailey has pushed back against expectations of rate cuts in the UK. The Bank’s own chief economist had earlier this week explicitly addressed the matter of when rate cuts may take place, leaving the middle of 2024 in the market’s sight for the first cut to Bank rate. Bailey was keen yesterday to caution of the risks that remain to inflation despite the Bank’s recent decision to not hike further. GBP has fallen back from its recent highs and the push back from the governor on the expectation for rate cuts will be a necessary condition to keep Sterling bid. It is unlikely to be a sufficient condition on its own, but the story is important for global rate expectations with western central bank heads seemingly resolved to keep rate cut expectations off the cards.

Discussion and Analysis by Charles Porter

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