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Winter is coming

Weekly update
  • Weekly market update
  • 5 minute read

A good week for

  • Emerging markets and the US led equities higher, gaining over 1.5% in sterling terms.
  • Gold gained over 1% in US dollar terms.

A bad week for

  • Bonds weakened across the board, especially US treasuries, down c. 1% in local terms.
  • Oil dropped c. -14% in US dollar terms.

UK economy

The Bank of England increased interest rates by 0.5% at the August meeting, while also downgrading their economic forecasts at the same time. The Bank’s base-case forecast now sees a recession in 2023, brought about by high inflation eroding real incomes and undermining consumption spending. The main driver of high inflation in 2022 will continue to be energy prices, expected to raise Consumer Prices Index (CPI) prints to as much as 13% in October of this year. However, the Monetary Policy Report, published last week, also highlighted concerns that wage increases remain high, which could further reinforce inflation. The labour market has remained tighter than Bank estimates predicted, in part due to the growth in the long-term sick over the last year. The deterioration in the UK economy has led market participants to rein in their expectations for monetary policy tightening, with weaker growth likely to translate in time to weaker labour demand and slower wage growth.

UK energy

The Bank of England’s 13% inflation forecast in October was based on estimates of the October Ofgem price cap, a cap on retail energy prices adjusted every six months. The energy regulator increased prices in April by 54%, to reflect higher wholesale energy prices in the period to February, before Russia invaded Ukraine. The October Ofgem price cap rise was previously expected to be 40%, and the Treasury announced a £15bn support package for households in May, which was designed to fully immunise the poorest households from the price cap increase. However, the rise is now expected to be 75% rather than 40%, meaning that the Energy Bill Support Scheme is no longer big enough to protect households. Further fiscal support is likely to be delivered by the next Conservative Party leader, though the two candidates favour different designs for the package.

US economy

The June labour report showed the US labour market to be stronger than other data sources had indicated. Unemployment fell to 3.5% in July, and while the participation rate fell further to 62.1%, participation amongst prime age workers improved. As in prior months, the household and establishment payroll data painted different pictures. Households reported a modest 179,000 rise in employment while payrolls surged by 528,000. Wage growth also accelerated to 0.5% month-on-month. The report was at odds with weaker indications from survey data, as well as a stronger initial jobless claims print. The report caused US markets to open lower on Friday, as a tighter labour market increases the likelihood that the US Federal Reserve will have to further tighten monetary policy.

US fiscal policy

US Democrats passed a bill in the Senate that would deliver climate and healthcare spending. The bill passed by 51-50 in the Senate, with Democrats using the reconciliation process to avoid a Republican filibuster, though this limited the scope. The bill is named the Inflation Reduction Act, but the policy contents are a slimmed down selection of the earlier Build Back Better Act, and few will have a significant influence on inflation immediately. However, the bill is expected to slightly lower earnings growth for some US companies, including via a 15% minimum tax rate for large businesses.

Sinoamerican relations

Tensions have flared once again between the US and China over a visit by House Speaker Nancy Pelosi to Taiwan. Taiwan is an independent country but the Chinese government claims it as Chinese territory. China is also believed to covet the technological assets of Taiwan, including its world-leading semiconductor manufacturing capability. Chinese officials spoke out against the visit and a number of military manoeuvres were carried out near Taiwan. However, a direct attack on Taiwan is considered by many to be unlikely, in part because the technological assets would likely be destroyed as a result.

 

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