UK getting tough but trouble looms

Roman Abramovich is by far the most prominent Russian Oligarch in the UK due to his ownership of Chelsea Football Club. Abramovich has always admitted to his friendship with the Russian President but denies being one of his inner circle.

Yesterday, the UK Government made the decision that it believes that Putin and Abramovich have a close relationship, and along with six other wealthy and influential Oligarchs Abramovich was subjected to stringent sanctions.

Abramovich had already put the football club up for sale, but the sanctions will mean that the sale will be put on hold or, at least, any transfer of ownership will be done on the Government’s terms. The sanctions include a ban of purchases or sales of players, the sale of merchandise and tickets for games only being available if they have already been sold.

While in the grand scheme, this is not an important move, it symbolizes the Government’s determination to make life as difficult as possible for those who benefit either in status or financially from their relationship to the Russian leader.

The Bank of England’s Monetary Policy Committee will meet next week not only to decide on any change in monetary policy, but it will also deliver its latest review of the UK economy. The only question about the review is just how downbeat it is likely to be.

The war in Ukraine is expected to knock around 1% off GDP this year as commodity and energy prices continue to rise. The story of oil and gas has made headlines around the world but the rise in other soft commodities is fast catching up.

For example, the price of what is at an eight-year high as supply concerns become a significant factor.

Inflation in the UK is now expected to peak above 9% as the tightest squeeze on household budgets in thirty years takes hold.

While a 1% fall in GDP could be considered the worst case, the UK ranks well above the U.S. in expected effects but below most individual Eurozone nations, and below the consolidated figure for the entire EU.

The pound remains volatile, driven almost entirely by changes to global risk appetite and the perceived length of the conflict in Ukraine.

Yesterday, it fell back to a low of 1.3083 and closed at 1.3084 as the previous day’s hopes of a negotiated settlement were dashed.

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Data was pre-energy spike

Data released yesterday showed that headline inflation in the U.S. rose to a high of 7.9% in February, up from7.5% in January. Core inflation, which strips out volatile food and energy costs also rose, this time by 0.5% versus a 0.6% rise in January. Core inflation is now at 6.4% from 6% in January.

The headline data does not yet include the rise in the price of oil and gas that has taken place since the Russian invasion of Ukraine began.

There are two significant takeaways from the data. The first is that headline inflation in the U.S. is going to peak at a far higher level than had previously been predicted, and core inflation continues to rise.

With the prospect of a fifty-basis point increase in short term interest rates having been virtually dismissed considering the likely hit to growth caused by the conflict, such an increase is now back on the table, given the level that inflation is likely to reach.

The U.S. is expected to see less than a quarter of a percent reduction in 2022 full year growth due to the Russian invasion of Ukraine, so although a fifty-basis point hike would be seen as hawkish, the views of certain members of the FOMC is well known even if they have been less vocal recently.

Global markets continue to be affected by the conflict, but next week will be dominated by Central bank meetings in the UK and U.S.

Jerome Powell appeared to confirm a twenty-five-point hike when speaking last week, but he also commented that fifty basis points could be on the table further down the line.

IT is well known that certain FOMC members favour front loading rate increases to get ahead of rising prices. This view may gain some momentum with energy prices unlikely to fall any time soon.

The dollar index benefited from the lack of progress in direct talks between the foreign ministers of Russia and Ukraine yesterday.

The Ukrainian Foreign Minister, Dmytro Kuleba, commented following his meeting with Sergei Lavrov, that the two sides are still extremely far apart.

The dollar index rose to a high of 98.59 yesterday, closing at 98.53.

Tapering returns to the market’s lexicon

The meeting of the ECB’s rate setting committee which ended yesterday decided that it would begin to ease back on support for the Eurozone economy far sooner than had previously been expected.

Since the Central Bank’s last meeting the landscape for the Eurozone economy has changed significantly with the effect of a prolonged conflict in Ukraine now a real possibility.

With reports of Russian forces not making the gains they expected despite massive superiority in terms of both men and machinery, progress has been slow due in no small part to the tenacity of both the Ukrainian army and spirit of the public.

Support for the economy will be cut starting next month. The taper in support will be from Eur 70 billion to Eur 40 billion, with a further cut to 20 billion by June.

The buying programme will finish by the end of the third quarter, with consideration of a hike in interest rates to follow.

Any bond purchases made after the end of Q3 would be due to a renewed consideration of the inflation position of the region.

The conflict in Ukraine has not only delivered higher energy costs the full effect of which is yet to be seen, but the effect on confidence, both investor and consumer could be just as damaging.

In December, the Central Bank predicted that average inflation across the whole of 2022 would be between 3.2% and 3.5%. It has now revised that forecast to an average of 5%.

In her statement to the press followed by questions, Christine Lagarde gave no sign of when rates would begin to rise. She said it would be some time after the end of the tapering of support. When challenged on the meaning of some time, she responded by saying it could be a few weeks or a few months.

This comment came more from the uncertainty surrounding the conflict than any uncertainty emanating from the ECB itself.

Yesterday, the euro gave back around half its gain from the previous session. It fell to a low of 1.0976 and closed just a pip higher at 1.0977.