Not enough money in the pot

UN Secretary-General Antonio Guterres speaking of the war in Ukraine, said that Russia ‘has unleashed a nexus of horror. Lives have been destroyed, human rights abused, families torn apart, children traumatised and hopes and dreams shattered.’

The recent G20 meeting in India produced a watered-down statement regarding the war in Ukraine and incredibly Russia was not even mentioned!

Everyone seems to be playing to their own agenda. Both China and India remaining ‘neutral’ but buying vast amounts of cheap Russian oil. Saudi Arabia and Russia have cut production to get the price of oil up. North Korea may now start supplying ammunition to Russia. Meanwhile, a top Chinese diplomat visiting Putin said that ‘with the world moving to multipolarity that China and Russia need to strengthen their multilateral strategic co-operation.’

War weariness among some western nations appears to be growing. A recent CNN poll found many Americans oppose Congress authorising additional military support for Ukraine. Furthermore, before President Zelenskyy’s visit to the White House last week, 23 Republicans wrote to the White House to reject a previously proposed $24bn funding request. Meanwhile, one of Ukraine’s staunchest allies, Poland, has announced it will no longer supply weapons to the country as a diplomatic dispute over grain exports has escalated.

What is Putin’s endgame? There are some suggestions that he is looking to draw out the conflict, in the hope that Donald Trump wins next year’s US presidential election. If so, Trump might force Ukraine to the negotiating table by threatening to withdraw military aid. On this basis, Putin might have hopes of retaining Crimea and a greater part of the Donbas.

Markets would welcome a peaceful resolution. However, a new Cold War would exist between NATO and Russia. Focus would then likely shift to the Pacific and China’s ambitions regarding Taiwan. Last week, Taiwan reported a record number of Chinese military aircraft over the Taiwan Strait.

Defence spending will need to remain elevated for years to come. This will be a challenge for many western governments with high levels of post-pandemic/energy crisis borrowing, ageing populations and an increasing social and healthcare burden let alone crumbling infrastructure to be replaced. HS2 already appears to be a casualty of ‘there’s not enough money in the pot’.

 

What have we been watching?    

A very important week with UK and European inflation data and interest rate decisions and guidance from the Bank of England and Federal Reserve. The US Federal Reserve continued to push its ‘higher for longer’ interest rate message. The Bank of England paused hiking rates for the first time in almost two years after the latest UK inflation data. Higher interest rates were reflected in continued weak ‘flash’ PMI business activity indicators (A reading over 50 denotes expansion/under 50 contraction). Meanwhile, China’s property sector woes continue to overshadow markets with Evergrande announcing that it would be unable to carry out its intended restructuring plan as one of its subsidiaries is ‘being investigated.’

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In the UK, inflation was much lower than expected with August CPI at 6.7% against 6.8% in July. Core inflation also undershot, falling further to 6.2%. Inflation had been expected to spike on higher petrol prices. Perhaps the greatest relief for the Bank of England (BoE) was that inflation in the service sector declined by 0.6% to 6.8%, the first convincing sign of improvement this year. In a tight vote 5:4 the BoE decided to hold UK interest rates at 5.25%. The BoE members seemed less concerned by wage growth and more by the weakness of the UK economy. While UK interest rates may have peaked it could take a while for them to be lowered. BoE chief economist Huw Pill said he favoured a rate profile like the shape of Table Mountain, a shallower summit but longer at the top! Meanwhile, public borrowing is running at a slower pace than forecast by the OBR at the time of the Budget in March by around £2.3bn per month. Chancellor Jeremy Hunt is likely to want to reinforce his fiscal credibility at November’s Autumn Statement but the latest numbers suggest some tax cuts will be forthcoming in the Budget next spring. The UK ‘flash’ September manufacturing PMI was not as weak as expected at 44.2, but the service sector PMI dropped to 47.2. Sterling edged lower to under $1.23 -good news for UK exporters but not so for oil imports!

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Eurozone inflation in August saw CPI edge a fraction lower at 5.2% as largely expected. The EU ‘flash’ September manufacturing PMI was broadly flat at 43.4.

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In the US, the Federal Reserve (Fed) kept interest rates on hold at 5.25%-5.5% but Fed Chair Jerome Powell pledged to keep rates restrictive until confident inflation was moving down to 2%. The ‘higher for longer’ interest rate message was reflected in the Fed’s ‘dot-plot’ interest guidance chart. This suggests the likelihood of one further increase this year and markets are now assuming a further 0.25% hike at the Fed’s next meeting in November. However, there is the complication of a possible US government shutdown. Looking to 2024, the ‘dot-plot’ conforms to the ‘higher for longer’ messaging with two 0.25% rate cuts removed relative to the June forecast guidance, and the latest chart suggestive of just a 0.5% reduction next year compared with 1% previously. The 2-year US Treasury yield hits its highest level since 2006 following the more ‘hawkish’ Fed projections. However, the Fed also said that it expects US economic growth to be stronger at 1.5%, up from 1.1% helped by strong household consumption. The US ‘flash’ September manufacturing PMI was a little better at 44.2 while the services sector PMI just about remained in expansion territory at 50.2.     

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Brent oil briefly hit a ten-month high of $95 before edging back to under $94 on the US interest rate guidance.

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Finally, pub owners have faced massive headwinds in recent years from pandemic lockdown to then an energy and cost-of-ling crisis. Just how tough it is for many smaller pub owners is revealed by industry data which showed that two pubs a day disappeared in England and Wales in the first half of 2023 and this is even before the very disappointing summer weather!

 

Read Last Week’s Alpha Bites – A blow for offshore wind

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.