Middle East War Could Spark Global Recession

Devin

Palestinian-Israeli conflict

Political

Economic

Summary:

Fear adds to Russia-Ukraine conflict risk and increases ‘probability of European and of US recession'.

A global recession could be set in motion by the conflict in the Middle East as the humanitarian crisis compounds the challenges facing an already precarious world economy, two of Wall Street's biggest names have warned.

The downbeat comments come as the City braces for another gloomy update on the UK economy, with the Office for National Statistics due to provide an update on how it fared during the third quarter on Friday.

After barely growing during 2023, the UK economy is again expected to be almost at a standstill, according to estimates by City economists. There are also new downbeat figures on the housing market, with UK mortgage lending predicted to show decade-low growth during 2023 and 2024.

In terms of the global economy, Larry Fink, chief executive of the world's largest asset manager, BlackRock, said a combination of the Hamas atrocities of 7 October, Israel's resultant attack on Gaza and Russia's invasion of Ukraine last year had pushed the world "almost to a whole new future".

In an interview with the Sunday Times, Fink said: "Geopolitical risk is a major component in shaping all our lives. We are having rising fear throughout the world, and less hope. Rising fear creates a withdrawal from consumption or spending more. So fear creates recessions in the long run, and if we continue to have rising fear, the probability of a European recession grows and the probability of a US recession grows."

Jamie Dimon, the chair of America's biggest bank, JP Morgan, also told the same newspaper that the combination of Israel's war on Hamas and Russia's invasion of Ukraine – were "quite scary and unpredictable".

"What's happening on the geopolitical front right now is the most important thing for the future of the world – freedom, democracy, food, energy, immigration," he said.

The comments come three weeks after similar apocalyptic remarks from Dimon, who is one of the world's best known financiers. Last month, he warned that it was "the most dangerous time the world has seen in decades", with the escalating conflict potentially having "far-reaching impacts" on energy prices, food costs, international trade and diplomatic ties.

The negative Wall Street sentiment concerning the global economy is also being echoed elsewhere. Last week, the Economist published a leader article entitled: "The world economy is defying gravity. That cannot last."

One of the reasons the conflict between Israel and Hamas is seen as posing a global economic threat is the world's reliance on the region's oil, which accounts for a third of the market. Economists often fear that spikes in the oil price can trigger global recessions.

The economy's weak performance means the threat of recession is already hanging over the UK. Last week, the Bank of England said in its monetary policy report: "UK GDP is expected to have been flat in 2023 Q3, weaker than projected in the [Bank's] August report. Some business surveys are pointing to a slight contraction of output in Q4 but others are less pessimistic. GDP is expected to grow by 0.1% in Q4, also weaker than projected previously."

Meanwhile, UK mortgage lending is expected to record decade-low growth in 2023 and 2024, the EY ITEM Club is predicting. The economic forecaster expects mortgage loans in 2023 to rise by 1.5% net in 2023 – and 2% net in 2024 – representing the lowest growth over a two-year period in a decade. It blamed the sluggish market on high mortgage rates, subdued economic growth and weakening housing market sentiment.

Anna Anthony, EY's UK financial services managing partner, said the UK is "still on track to avoid recession this year" but the economic environment remains challenging. "Significant cost-of-living pressures continue to affect households' ability to spend, and an increasing number are finding it difficult to keep up with loan repayments."

Source: The Guardian

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Alex

Central Bank

Economic

The S&P/ASX 200 Index (ASX: XJO) is holding onto a 0.3% gain in early afternoon trade today as investors eye tomorrow's interest rate decision from the Reserve Bank of Australia (RBA).

That decision is due out on Tuesday at 2:30pm AEDT.

The current official cash rate has stood at 4.10% since 7 June. That's up from the historic low of 0.10% back in May 2022, when the RBA first began to rapidly ratchet up interest rates to get soaring inflation under control.

Inflation has come down from the late 2022 highs. But the most recent reading of 5.4% remains well above the central bank's target range of 2% to 3%.

So, will that see the RBA hike interest rates again tomorrow after hitting the pause button for the past four meetings?

Can ASX 200 investors expect the RBA to boost interest rates?

While the jury remains out, the vast majority of economists are forecasting the RBA will deliver a 0.25% interest rate hike tomorrow, bringing the official cash rate to 4.35%.

That could pressure the ASX 200, as market expectations on the RBA's next move remain mixed. According to the ASX's RBA Rate Indicator, market expectations of an interest rate increase tomorrow stood at only 50% as of Friday 3 November.

That's a far more optimistic view than the ones held by the lead economists at the big four ASX 200 banks, with all four expecting a rate hike from the central bank tomorrow.

Indeed, surveys conducted by both Bloomberg and The Australian Financial Review show most economists agree with those at the big banks. Thirty three of the 35 economists polled in the AFR survey expect newly appointed RBA governor Michele Bullock will announce an interest rate increase tomorrow.

And that might well not be the end of the tightening cycle ASX 200 investors need to contend with. Nine of the 35 economists said they are expecting two more increases, taking the official cash rate to 4.6%.

Simon Doyle, the local CEO of fund manager Schroders, agrees with that hawkish outlook.

"We think it's going to be very difficult for inflation to go back to 2% sustainably without more work from central banks," he said. "You could easily get another couple of rate hikes, another 50 basis points."

Josh Williamson, chief economist for Australia at Citigroup, also shares that view.

According to Williamson (courtesy of Bloomberg): "The board could even discuss a possible 50-basis-point hike, but we doubt this would be delivered given the degree of hiking to-date and the realpolitik…

Rates are not far enough above neutral to sufficiently restrain domestic demand growth at a time of high inflation. This will not be fixed by just one more 25 basis-point increase."

But as we said up top, the jury is still out on whether the RBA will increase interest rates tomorrow. And if the central bank does hold fire again, it could well spur a late afternoon rally on the ASX 200.

James McIntyre at Bloomberg Economics is among the minority forecasting another pause tomorrow.

"The RBA faces a difficult call," he said.

McIntyre continued:" Inflation expectations are far more consequential and, if the RBA judges those remain intact despite the fuel-price boosted inflation read, then expect rates to remain on hold. That's how we think it will play out."

Source: The Motley Fool

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FastBull Featured

Daily News

[Quick Facts]

1. Saudi Arabia and Russia will continue production cuts by year-end.

2. Employment data allows the Bank of Canada to remain patient.

3. U.S. business activity growth has slowed for the 3rd month and services stagnate.

4. Non-farm payrolls data shows a slower job market across the board.

5. Fed's Barkin says whether to raise rates will depend on inflation.

6. Fed's Bostic sees no need for further rate hikes under the current economic trend.

7. Fed's Kashkari doesn't want to overreact to just one month of data.

[News Details]

Saudi Arabia and Russia will continue production cuts by year-end

As concerns about demand and economic growth continue to weigh on the crude oil market, major oil exporters Saudi Arabia and Russia confirmed on Sunday that they will continue with additional voluntary production cuts until the end of this year.

The two countries said they would evaluate the output cuts next month to consider extending, deepening, or increasing them.

Saudi Arabia confirmed that it will continue with its additional voluntary production cut of 1 million barrels per day (bpd). Thus the country will produce only around 9 million bpd of crude oil in December. This additional voluntary production cut is intended to reinforce the preventive efforts of OPEC+ producers to support oil market stability and balance.

Moscow also announced that it would continue to voluntarily cut its crude oil and petroleum product exports by an additional 300,000 bpd until the end of December.

Employment data allows the Bank of Canada to remain patient

The labor market in Canada remains good but is slowing. The unemployment rate rose again in October to 5.7% from 5% in the spring. The underlying data suggest that job seekers are facing greater difficulties than a year ago. Wage growth, while still strong, was also below expectations. The jobs data came out alongside other weak economic data, including weak business sentiment and hiring intentions. Inflation, while not yet close to the Bank of Canada's target, continues to slow. This will allow the Bank of Canada to remain patient and stay on hold.

U.S. business activity growth has slowed for the 3rd month and services stagnate

US PMI data for October showed a much more subdued economy compared to the latest GDP, with business activity growth slowing for the third consecutive month. The surge in service sector activity seen over the summer has stalled. Meanwhile, the manufacturing sector is struggling to regain momentum amid weak global demand. A silver lining to the weak demand environment was a further cooling of price pressures in October. A brighter inflation outlook and hopes of interest rates topping out help boost business confidence in the outlook for the year ahead, but the inflow of new business in both the services and manufacturing sectors will need to accelerate to ensure that strong growth can be maintained.

Non-farm payrolls data shows a slower job market across the board

U.S. non-farm payrolls added 150,000 jobs in October, below market expectations of 180,000, while data for August and September were revised downwards by a total of 101,000.

The private sector contributed just 99,000 jobs to this data, less than half of September's 246,000, while the government sector contributed 51,000, unchanged from the previous two months at 51,000. The stable job growth in the government sector was due to the wage slowdown in the private sector and the fading impact of early retirement. Recruitment in the government sector is gradually showing a comparative advantage.

In the private sector, goods manufacturing job growth fell rapidly from +28,000 in September to -11,000 in October. Among them, employment in the construction sector has been steadily rising. The reason for this is that more buyers are turning to new homes as a result of the lack of inventory in the secondary market, with new home sales up 12.3% in September from a month earlier, and single-family housing starts rising steadily in September.

This sharp decline in non-farm payrolls was not only due to the UAW strike. A sharp slowdown in service sector employment was also a key factor. Only 110,000 jobs were added in the service sector in October, less than half of what was added in September (218,000). Of these, education and health services contributed the most (89,000).

The sector that saw the biggest change this month was the leisure and hospitality industry, which saw a significant deceleration in new employment to +19,000, compared with +74,000 last month. This was due to the fact that the growth momentum in Restaurants & Bars (+48,000) last month was not sustained and negative growth (-75,000) was recorded this month, causing a significant slowdown in employment in this sector.

Overall, September's non-farm payrolls still exceeded expectations, reflecting the bumpy path of the cooling labor market. However, the job gains were only seen in specific sectors, and the impact of the UAW strike could spill over into October's non-farm payrolls. A low response rate could lead to revisions to September's data next month, and employee confidence is low amid a downward trend in the MoM hourly wage growth. Despite strong job growth, the unemployment rate has not fallen. Supply and demand are gradually moving into balance, so the employment data beating expectations does not absolutely mean that the employment trend is reversed. We can patiently wait for next month's data.

Fed's Barkin says whether to raise rates will depend on inflation

Richmond Fed President Tom Barkin delivered a speech last Friday after the release of non-farm payrolls. He pointed out that last month's slowdown in job growth is a welcome sign of the normalization of the labor market, indicating that it is moving in the direction the Fed officials hope to reduce inflation. But he added that he was not yet ready to state where monetary policy would go next.

We have a lot of time before deciding whether to raise rates again or keep the short-term interest rate target unchanged. His view on whether to raise rates again will depend more on the inflation report.

Fed's Bostic sees no need for further rate hikes under the current economic trend

The current trend of the economy seems to indicate that no further rate hikes are needed, said Atlanta Fed President Raphael Bostic in an interview with the press. My expectation is that we will maintain a slow and steady growth path, and if that continues to be the case, I think policy now will be restrictive enough to get us to the 2% inflation target, he said. There's still a long way to go, and there's still a lot to watch and monitor as we think about how the economy evolves.

Bostic expects rates to remain high for about eight to 10 months until the second half of next year. While he does not predict a recession in his baseline outlook, he thinks growth will slow in the coming months.

Fed's Kashkari doesn't want to overreact to just one month of data

Minneapolis Fed President Neel Kashkari expressed his satisfaction with the latest non-farm payrolls data in a speech last Friday. The data shows that the labor market is slowing down, which is what we're expecting, and it's helpful, Kashkari said.

It makes us feel more comfortable that the economy is coming back into balance, but I don't want to overreact to just one month of data, Kashkari said when he was asked if the data showed that the economy was slowing down and was enough to stop the Fed's rate hike cycle.

It is too early to make a definitive decision on whether there is a need for further rate hikes, and officials need to monitor the data, especially the evolution of inflation data.

[Focus of the Day]

UTC+8 12:10 Bank of Japan Governor Kazuo Ueda speaks

UTC+8 01:00 Next Day: Bank of England chief economist Huw Pill speaks

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Economic

Forex

Investors eagerly await RBA rates news

The trading market is a particularly exciting place to be next week with many events and information to pay attention to. IGTV host and financial analyst Jeremy Naylor provides a breakdown of what to expect.

On Monday, the Bank of Japan (BoJ) will release their meeting minutes, but experts believe it won't have a big effect on the market.

Keep an eye out for the Reserve Bank of Australia (RBA) meeting on Tuesday. The new governor wants to raise interest rates despite political opposition. This decision might influence the value of the Australian dollar. We'll also see UK retail sales, Chinese trade balance numbers and US crude oil inventories.

Wednesday brings us trade numbers from France, Euro Zone retail sales and US wholesale inventories. On Thursday, we'll get consumer and producer price data from China, along with weekly jobless claims from the US. The week will finish strong with the release of UK gross domestic product (GDP) data, trade balance numbers, industrial production and consumer sentiment.

Golden week for equities and bonds

Equities and bonds have had an outstanding week, with yields hitting a low point not seen since September. This means that the US Treasury is borrowing a lot in short-term offerings, suggesting they believe long-term interest rates will decrease. However, some experts think the US dollar needs to weaken for this trend to continue.

In terms of stocks, the S&P 500, NASDAQ, Wall Street and Dow Industrials have all been performing well. Keep an eye on Apple, though, as they recently missed their earnings expectations, raising concerns about their future performance. This may create an opportunity for new market leaders to emerge in the coming year.

Companies report earnings

Some big companies are reporting earnings next week. Some notable ones include Ryanair, Associated British Foods, Persimmon, UBS, Uber Technologies and Marks & Spencer.

Other earnings include ITV, Airbus, Walt Disney, Lyft, WH Smith, AstraZeneca, Deutsche Telekom and Allianz. AstraZeneca's report on COVID vaccines will be particularly interesting, as other companies in the industry have recently reported financial losses.

Overall, get ready for an eventful week filled with data releases and corporate earnings that have the potential to make waves in the trading market.

To stay updated on all economic events of today, please check out our Economic calendar

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Westpac

Economic

The U.S. employment outcomes of the past six months point to balance between demand and supply. For the outlook, downside risks are growing.

The abrupt upturn in nonfarm payrolls employment witnessed in September and Q3's (very) strong GDP print led the market to question whether the U.S. economy was re-accelerating, warranting additional tightening by the FOMC. Just a month on however, a benign view for inflation has emerged. Indeed, there is now evidence of downside risks forming for both employment and consumption.

October's 150k payroll gain was half September's increase and also below August's 165k. More to the point, it leaves the 3-month average at 204k, a long way short of the 342k average of the same period a year ago, and 667k a year before that (2021). 204k is still twice the 100k pace FOMC members have tabled as consistent with balance between labour demand and supply. But current population growth provides enough supply for 130k new jobs a month. And, if the trend rise in participation is also accounted for, supply has been sufficient over the past year for around 250k new jobs per month. Note as well that, during the past 12 months, total hours worked have declined 0.9%. As such, the creation of 105k new jobs has been required each month to offset hours lost by existing workers.

The household survey in contrast points to slack already building, the number of employed having risen just 32k per month May to October, including an average decline of 13k the past three months. This lack of employment growth – while the labour force has grown by around 170k per month – is behind the unemployment rate's 0.5ppt rise since April, and the U6 measure of underemployment's 0.6ppt gain. At 3.9%, the unemployment rate is now above the year-end forecast of FOMC members at the time of their September meeting and just 0.2ppts below the peak rate the Committee expects through 2024 and 2025. Available detail from the business surveys points to a further deterioration in the current pace of employment, making a continuation of the six-month uptrend in unemployment and underemployment likely.

A Decisive Turn for U.S. Labour Market_1

The consequences for wage growth of the resetting of demand and supply have already been significant, average hourly earnings growth decelerating from a recent peak of 5.9%yr in mid-2022 to 4.1%yr currently. With the current rate only marginally above core PCE inflation of 3.7%yr at September, the current nominal wage pulse points to a slow healing of real wages from their pandemic lows.

Overall, the U.S. labour is still in robust structural health, yet it is evident that the heat has come out and downside risks for employment and household incomes are forming. To be clear, this is not an assessment based on October's data alone, but rather the outcomes of the past six months, with the full effect of tight financial and credit conditions still to be felt.

We remain of the view that the FOMC will soon have to shift to a much more balanced view of the outlook and begin making real-time assessments of the appropriate degree of policy restrictiveness. Through 2024, with growth below-trend, this will certainly lead to a lower level of interest rates than today. As has been the case on the way up however, how the term premium and other elements of financial conditions evolve will dictate the precise scale and timing of adjustments to the fed funds rate by the FOMC.

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Energy

Oil advanced after slumping in the first two days of the week, as a still-contained Israel-Hamas war caused attention to shift to global demand.

Global benchmark Brent traded above US$85 a barrel, near where it was prior to the Oct 7 attack, while West Texas Intermediate was over US$81.

Israeli forces continued moving gradually into the Gaza Strip, with the army reporting its first casualties since the start of the land assault.

US Secretary of State Antony Blinken will head back to Israel on Friday and make other stops in the region as part of diplomatic efforts that have so far helped stop the conflict from spreading across the Middle East.

Away from the war, there’s evidence the demand outlook is wavering, with both Brent and WTI posting their first monthly declines since May. Manufacturing in China, the world’s biggest oil importer, fell back into contraction in October, while BP Plc said global gasoline and diesel markets are oversupplied.

Brent has snapped four straight months of gains to end more than 8% lower in October, as demand concerns overshadowed the Israel-Hamas conflict. Fears of supply or transport disruptions in a region that’s the source of around a third of the world’s crude have eased as the war remained contained.

“The geopolitical risk premium to oil is fading, which means the oil market’s focus is likely to return to global demand and supply factors,” said Han Zhong Liang, an investment strategist with Standard Chartered plc. Near-term tightness in oil markets may give way to demand destruction in the longer run, with prices likely to trend lower, he said.

The industry-funded American Petroleum Institute said US crude stockpiles rose by 1.35 million barrels last week, according to a person familiar with the data. There was also a modest build at the Cushing, Oklahoma, storage hub. AlphaBBL also reported an expansion of inventories at Cushing. Official data is due later on Wednesday.

Source: Bloomberg

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Cohen

Economic

Following the annual meetings of the International Monetary Fund (IMF) and the World Bank this month, the Middle East is teetering on the edge of a major conflict and the rest of the world continues to fracture along new economic and geopolitical lines. Rarely have the shortcomings of world leaders and existing institutional arrangements been so glaringly obvious. The IMF's governing body could not even agree on a final communiqué.

True, the World Bank, under its new leadership, has committed to addressing climate change, tackling growth challenges and strengthening its anti-poverty policies. It aims to increase its lending by leveraging existing capital and raising new funds. For the latter, however, it will need US congressional approval and that seems unlikely with Republicans controlling the House of Representatives. Importantly, the planned increase in lending capacity falls far short of what the world needs. It is more than just a drop in the bucket, but the bucket remains largely empty.

As with the climate discussions surrounding the United Nations General Assembly in September, there was much talk about scaling up private capital by lowering the risk premium that investors demand for projects in poor countries. Although the social returns to investing in solar power in Sub-Saharan Africa (where there is abundant sunshine and a dearth of energy) are higher than in the cloudy north, the private sector has been reluctant to enter, owing to fears about political and economic instability.

The upshot of all this "de-risking" talk is that the public sector should provide whatever subsidies it takes to "crowd in" the private sector. No wonder big private financial firms are hovering around these international meetings. They are ready to feed at the public trough, hoping for new arrangements that will privatise the gains while socialising the losses — as past "public-private partnerships" have done.

But why should we expect the private sector to solve a long-run public-goods problem like climate change? The private sector is well known to be short-sighted, focusing wholly on proprietary gains, not social benefits. It has been awash with liquidity for 15 years, thanks to central banks pumping huge amounts of money into the economy in response to the 2008 financial crisis (which the private sector caused) and the Covid-19 pandemic. The result is a roundabout process whereby central banks lend to commercial banks, which lend to private Western firms, which then lend to foreign governments or infrastructure-investment firms, with transaction costs and government guarantees piling up along the way.

It would be much better to use liquidity to strengthen multilateral development banks (MDBs), which have developed special competencies in the relevant areas. Though MDBs have sometimes been slow to act, that is largely because they have obligations to protect the environment and uphold people's rights. Given that climate change is a long-run challenge, it is better that climate investments be carried out wisely and at scale.

When it comes to achieving scale, the key is not just to mobilise more money by borrowing from rich countries, with all the well-known problems that entails; it is to enhance emerging markets' and developing countries' revenues. Yet existing international arrangements are effectively blocking this urgent imperative.

Consider the Organisation for Economic Co-operation and Development's base erosion and profit shifting (BEPS) framework. The hope was that BEPS would make rich corporations pay their fair share of taxes in the countries where they operate. The prevailing "transfer price system" gives multinationals enormous leeway to report profits in whatever tax jurisdiction they prefer. But the proposed BEPS reforms — even if fully adopted, which seems unlikely — seem to have limited effect and will provide developing countries with limited additional revenues at most. Worse, the invidious investor-state dispute settlement process — which allows multinationals to sue governments when they make regulatory changes that could harm profits — has further constrained the resources available to emerging markets and developing countries, even as it has hampered their efforts to respond to environmental and health challenges.

Then there is the World Trade Organization's Trade-Related Aspects of Intellectual Property Rights (TRIPS) regime, which led to vaccine apartheid, illnesses, hospitalisations and unnecessary deaths in the developing world during the pandemic (further increasing expenditures and decreasing revenues). And TRIPS is designed to fill rich multinationals' coffers with royalties on intellectual property from the developing world well into the future. In fact, the entire structure of trade agreements has preserved neocolonial trade patterns, with developing countries stuck producing mostly primary commodities while developed countries dominate the high-value-added links in the global production chain.

All these flawed arrangements can and should be changed. Doing so would provide developing countries with the resources they need to invest in climate change mitigation and adaptation, public health and the rest of the Sustainable Development Goals.

Perhaps the single most important improvement to the global financial architecture would be an annual issuance of, say, US$300 billion (RM1.43 trillion) in special drawing rights (SDRs, the IMF's international reserve asset), which it can "print" at will if advanced economies agree. As matters stand, the bulk of SDR issuances go to rich countries (the IMF's largest "shareholders") that don't need the funds, whereas developing countries could use them to invest in their future or to pay back debt (including to the IMF).

That is why rich countries should recycle their SDRs by turning them into loans or grants for climate investments in developing countries. While this is already being done to a limited extent through the IMF's Resilience and Sustainability Trust, it could be scaled up massively and redesigned to achieve a bigger bang for the buck. The best part about this approach is that it does not really cost advanced economies anything. Unless one is beholden to some misguided ideology, there is no reason to oppose it.

Even if advanced economies reached net-zero emissions tomorrow, we would still be doomed because emissions in developing countries would continue to rise. While offering the private sector better incentives (a euphemism for bribes) has been discussed exhaustively, very little progress has been made, and tariffs and other restraints on environmentally harmful imported goods, such as those Europe is now imposing and threatening to increase in the future, are unlikely to elicit the kind of cooperation that is needed.

The best — and perhaps the only — strategy, then, to ensure that developing countries and emerging markets do what they must if we are to avert a climate catastrophe is to start rectifying some of the global injustices of the past and to generate more income and affordable financing for developing countries.