Macro Briefing: 31 October 2022

* Lula reclaims Brazil’s presidency and beats Bolsonaro in narrow victory
* Eurozone inflation reaches new record high as economy slows in Q3
* Russia suspends grain deal that allowed Ukraine exports
* Goldman Sachs expects Fed rate hikes will peak at 5% in March
* China manufacturing and services sectors contract in October
* No end in sight for China zero-Covid policy
* Germany’s economic link to China in focus as chancellor heads to Beijing
* US consumer spending rose in September despite inflation’s bite
* Pending home sales in US fell fell further than expected in September:

Does the rebound in US GDP in Q3 overstate the economy’s strength? Economist Paul Krugman entertains the idea by noting the core GDP paints a weaker profile for the economic trend. “Some observers like to focus on ‘core GDP,’ which excludes net exports, inventory changes and government purchases,” he writes. “Where the headline number shows an economy that slumped in the first half of this year and resumed growth in the third quarter, core G.D.P. tells us a tale of an economy steadily slowing, and currently more or less stalled:”

China risks falling into the middle-income trap, writes Mickey Levy, senior economist at Berenberg Capital Markets and a visiting scholar at the Hoover Institution: “China’s days of persistently strong growth are over, but it will remain an economic powerhouse… Nevertheless, Mr. Xi’s tightening grip and rejection of free enterprise raise the probability that China will become mired in the middle-income trap that has captured many emerging nations. Its oppressed citizens will pay the price. China’s trading partners are already feeling the effects. Looking forward, this economic environment makes China’s international maneuvering prone to risks and a potential source of global instability.”

Rising interest rates take an especially heavy toll on once high-flying tech stocks. “There was rampant speculation in the sector,” says Rupal Bhansali, chief investment officer and portfolio manager of global equity strategies at Ariel Investments. With rising rates, “people come back to their senses and realize we need to be more circumspect.” As one example of the dramatic shift in market sentiment, The Wall Street Journal notes: “At the start of the year, Meta was one of the 10 biggest companies in the S&P 500. Today, it isn’t even in the top 20, with companies such as Chevron Corp. and Bank of America Corp. overtaking it.”

A recession in 2023 could be mild, writes Alan Blinder, a former vice chairman of the Federal Reserve: “The so-called break-even rates of inflation implied by the market for Treasury Inflation Protected Securities are broadly consistent with the Fed’s inflation target. The New York Fed’s survey of consumers finds expected inflation over the next three years to be just under 3%, as does the University of Michigan’s survey. The implication is that the Fed won’t have to grind the economy into the ground to squeeze expected inflation down to its target. This is not Volcker redux.”