UK assets in focus this week
This week’s focus in markets apart from the US’s weak inflation print last week is on Sterling and the FTSE in the wake of a raft of economic data points, as well as the new Chancellor Jeremy Hunt’s Autumn statement on Thursday the 17th.
UK inflation this morning came in at a level not seen in 41 years in this country, putting further pressure on the Bank of England to raise rates by another 75 bps at their next meeting. The YoY figure came in at 11.1%, mainly driven by soaring energy prices but it is a 0.2% overshoot on what the Central Bank had considered was going to be the peak. BoE policy makers have repeatedly suggested that they are going to continue to raise rates and today’s print confirms the need to continue hiking aggressively, as money markets now price in a peak of about 4.65% by August of next year. However, the BoE’s governor Andrew Bailey has voiced his concerns on the decline in the UK housing market and weak GDP growth, which might hurt his appetite to continue raising as much as markets believe.
Usually it’s a pretty easy trade, high inflation, interest rate hikes and you go long the currency but with the current stagflation fears in the UK, it makes it a bit trickier. With the Bank of England raising rates further, it causes further tightening in business conditions which in turn causes a further decrease in demand which dents GDP. The initial reaction to the data this morning was Sterling lower as a result of this. A short spike higher by the algos but a sharp move lower, -0.55% to be exact, and then a bounce back, as shown below.
The retracement does seem to be a bit more of a Dollar move at the time of writing, as the Greenback has again had some downside to start the European session.
The question is then where we go from here. High inflation today, higher unemployment yesterday has failed to move markets much, which then tells us they clearly lie in wait for the budget announcement tomorrow. Despite the government programme to help with the rising energy prices, they were in fact the main drivers of this print. Gas prices rocketed 36.9% and electricity was up 16.9% on the month, which is a substantial increase, couple that with the wage growth seen lagging, means today is a bad day for the ones most seriously affected. The ONS have also said this CPI print would be 13.8%, rather than the 11.1% it came in without the government’s energy price guarantee. 10 of 11 food categories rose as well, with the exception of tea and coffee, and the cost of leisure activities also rose. Difficult times for the lower paid people of the UK, and also a difficult situation for the BoE to be in. The further they raise rates, the further they risk crippling the economy, but with the price rises across the board and wages not growing to get even close to matching, it is difficult for people to keep up with the cost of living. However, I do personally believe this will be the peak in inflation in the UK and hopefully the budget tomorrow can provide some respite.
UK’s Autumn Statement
On Thursday we will see the UK’s attempt to shorten the length of the impending recession. Chancellor Jeremy Hunt has said that the new financial plan will try to make any recession as short as possible. On Sunday on Sky News, he commented “I want to make sure that this recession, if we are in one, is as short and shallow as possible”. He certainly has a fair bit of work to do if that is going to prove correct.
If you look up in a dictionary what the word stagflation means, you’d nearly see a picture of the Union Jack. An economy with rampant inflation and the absence of economic growth is exactly what we have got here, which is not a good environment for the Pound and the FTSE and unless markets enjoy what happens tomorrow, then I think it looks like more pain ahead for the UK.
He is due to announce how to fill the gap on the £50B hole in the budget. Reports are suggesting that he will attempt to raise revenue from things like income tax, dividends tax, levies on inheritance and windfall charges on energy companies. He has also suggested that the government are likely to extend measures to help households deal with the rising gas and electricity bills, but there are likely to be constraints once the current measures end in April.
The plan seems to be to tax those with “the broadest shoulders” as he put it himself, also suggesting there is only so much you can ask for from people on the lowest tax bracket. There is a possibility that the highest earners will pay more tax, as well as the threshold to be in that bracket to be lowered. He is also set to extend the freeze on these thresholds through to 2027/2028, raising roughly £5B a year by this time.
How you look to position yourself ahead of this is anyone’s guess. The UK is in a tough place at the moment and the current situation is GBP negative and FTSE negative. The fact markets have not reacted to the Labour market figures of yesterday and the Inflation figures of today means that they lie in wait for this tomorrow. All traders will have eyes on the UK at 12:30 tomorrow for the next fundamental driver and how to position ourselves on these assets moving forward.
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