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Market Report: China’s sharp slowdown, UK strikes, and Fed focus on inflation

Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

The toll of rising Covid cases and rolling lockdowns on the Chinese economy has been pulled into sharp focus by PMI data showing manufacturing and services activities fell at the fastest pace since April.

It’s clear that a change to the zero-Covid policy can’t come soon enough to propel a recovery, and investors are clinging onto hopes that renewed attention of a vaccination programme for older citizens will hasten a relaxation of the rules. But given it’s so unclear exactly when authorities will change tack, stocks in Asia remained volatile.

The impact of waves of strikes in the UK is being assessed, with the economy set to contract more sharply as industrial action takes its toll on businesses across the retail and hospitality sector in particular. Walk outs by postal staff are causing huge headaches for firms in the crucial festive period, with warnings goods may not arrive in time for Christmas due to strike days. The hospitality sector is now facing the prospect of fresh mass cancellations as rail workers prepare to walk out, with partygoers fearful of being stranded. It can’t come at a worse time, given bookings were already under pressure, due to the cost-of-living crisis, with opening hours being reduced by some businesses to cope with rising energy and labour costs.

Fears of a wage price spiral are growing, with the Bank of England clearly worried that if upper demands of unions are met, companies will be forced to hike the price of good and services to preserve profit margins and survive. Labour shortages in key industries have already exacerbated the problem.

While the UK is set for a year-long recession, in the US stagflation looks more likely to set in, with interest rates set to rise again to slow the economy, given that inflation is still proving so rampant. Investors will be watching closely for clues from Fed Chair Jerome Powell during his speech later in Washington, DC. They are desperate for indications about the trajectory of rate rises and how high they will have to go, to bring down the price spiral. Although super-sized rate hikes appear to be in the rear-view mirror, an increase of 0.5% is still expected in December with the tightening cycle considered to be far from complete. The big worry is among central bankers is that if economic pain isn’t inflicted now, inflation will be much harder to tame over the longer term.

Relief is unlikely to come thick and fast from the pumps, with the oil price edging up again over supply concerns. American Petroleum Institute data showed that US crude stocks had fallen by way more than expected last week, dropping by almost 8 million barrels. Speculation that the OPEC+ cartel might cut production, to keep a higher floor under prices at a key meeting next week, is adding to upwards pressure. But worries about the outlook and a deteriorating global economy are likely to hold back significant gains in energy stocks.

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