UK escapes contraction, as markets reel from Powell comments

• UK escapes Q3 contraction, while construction orders slump 20%
• Powell’s warning snaps S&P 500 winning streak
• Central banks continue to dominate today

European markets are on the back foot this morning following a US session that saw the S&P 500 finally snap an eight-day winning streak. Data out of the UK have dominated proceedings thus far, with the third quarter growth figure of 0% seeing a narrow escape after expectations we would fall into negative territory. Nonetheless, the UK economy is well and truly in soft landing territory, with the Bank of England likely content that this lackluster growth figure will help soften consumption and inflation going forward. Coming in a year where the UK had been expected to underperform its Western peers, that fact that we are yet to see a single quarterly contraction does highlight a welcome resilience in the face of elevated interest rates. Industrial and manufacturing production figures held up well in September, although the construction orders figure of -20% showed a sharp collapse in activity for a sector that is increasingly feeling the force of higher interest rates.

Yesterday’s appearance from Federal Reserve Chairman Powell helped bring the equity market resurgence to a grinding halt, with his apparent hawkish tone sending the 10-year yields higher and equities lower. Powell’s pledge that they “won’t hesitate” to raise further if necessary comes into question next week, with US inflation due on Tuesday. Nonetheless, we are expecting to see inflation dip sharply lower thanks to an October energy price slump that saw WTI fall $10 to $80.

The central bank theme continues today, with an appearance from ECB Governor Lagarde and FOMC member Logan. With markets having been remarkably jittery in the wake of Powell’s appearance, the market confidence seen of late clearly stands on relatively unstable presumptions. Nonetheless, the ‘data dependent’ theme that forms the basis of this less hawkish shift remains the key element to consider. With inflation expected to continue its downwards trajectory and economic strength coming into question, there is a strong chance that we see rates remain steady from here on in.