Bassanese Bites: Recession averted? – July 17 2023
Global markets
The key development over the past week was the weaker-than-expected US CPI result, which has reduced the risk of further aggressive Fed action that ultimately pushes the economy into recession. According to Fed comments, it still seems likely the Fed will hike at next month’s policy meeting, though further rate hikes after that are now questionable provided inflation continues to ease. Most encouraging was an easing in core service sector inflation.
Of course, the US labour market remains tight and wage inflation uncomfortably high – suggesting the Fed might still require a period of below-trend economic growth (rising unemployment) to be sure inflation gets back to target. But with tentative signs of an easing in wage growth, the need for a hard landing is no longer as evident as it seemed only a few months ago. Indeed, there’s growing evidence that the lingering excess US labour demand gap is being met by an improved labour supply response (higher immigration and workforce participation) and some scaling back in corporate America’s hiring ambitions.
Likely encouraging Q2 earnings results and a likely solid US retail sales report are the key US events this week.
Elsewhere around the world, the Bank of Canada still saw fit to lift rates 0.25% last week, though the RBNZ left rates on hold. A key update on NZ inflation will be out this week. In China, lower-than-expected inflation data is instead giving rise to deflation scares amid a sluggish economic recovery. Chinese Q2 GDP is out today. UK CPI data will also reveal just how problematic inflation remains and whether the BOE needs to hike rates further even in the face of a weakening economy.
