International Roundup: Inflation, Global Tensions and Political Shifts

By:

Interactive Brokers’ Senior Economist

Against a backdrop of high inflation, global tensions and political shifts, a new record was established in the UK during a week highlighted with numerous unusual developments. UK Prime Minister Liz Truss resigned after serving for the shortest duration of all prime ministers while China raised eyebrows with its highly unusual and alarming decision to delay the release of GDP data and other economic indicators. Also in the Pacific, the Japanese yen hit a 32-year low relative to the dollar while Australia barely added jobs in September.

The week started with China announcing it would delay the release of GDP data originally scheduled for Tuesday, Oct. 19. The release of quarterly retail sales, industrial production and monthly unemployment rates was also delayed. The delay occurred during China’s ruling party’s Congress, which occurs every five years, and sparked speculation that the Chinese economy is worse than commonly believed. The delay triggered a selloff of equities in Asia. The ruling party’s Congress also featured aggressive rhetoric opposing Taiwan and Hong-Kong independence while also stiffly maintaining the country’s zero-COVID-19 policy that has been a headwind to economic growth.

Japan also had troubling developments. In order to provide economic stimulus, it announced an emergency bond buying program to keep a low yield on 10-year bonds. This supported the continuing weakening of the country’s yen currency, which hit a 32-year low against the U.S. dollar. The impact of the country’s weak yen was reflected, in part, by soaring costs for imports, including energy commodities. These increased costs contributed to inflation in September reaching an eight-year high of 3.0%, in-line with market expectations and higher than August’s 2.8% figure.

At the same time, chaos flourished in the UK as the country did an about face with its fiscal policy. It had proposed tax cuts to stimulate its economy, but investors responded by aggressively selling equities and bonds due to fears that the change would support already high inflation that recently hit a record high of 10.1%, higher than expectations for a 10% rise and from August’s reading of 9.9%. The UK quickly cancelled the tax breaks and PM Liz Truss, who had championed the policy, resigned, explaining that she lacked confidence in her political party. In resigning after serving only 45 days, she established a new record as the country’s shortest serving PM. September’s hot inflation was driven by utilities, shelter, and food while lower gasoline prices offset some of the upside momentum.

Canada also struggled with year-over-year inflation reaching 6.9%, hotter than expectations of a 6.8% rise. While the number decelerated from 7%, the shorter-term month-over-month figure for September accelerated from 0% to 0.4%. Costs for food, furniture and passenger vehicles contributed largely to inflationary pressures while lower gasoline prices offset some of the pain.

Australia’s labor market underperformed expectations. Its job market added a mere 900 jobs in September, much less than expectations for a gain of 25,000, but still moving in the right direction. Unemployment and participation rates came in as expected and were unchanged from August at 3.5% and 66.6%, respectively. The steady numbers supported optimism that the country may be able to avoid a recession. Australia’s economy has been resilient from global economic shocks in the past. The nation is credited with only having three recessions since 1959, one of which was triggered by the Covid-19 pandemic.

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