22 August 2022: Retail Sales bounce a positive blip

GBP – Economy in need of major injection of support

When Boris Johnson announced his Resignation on July 5th, he refused to step down immediately and hand over control to his deputy Dominic Raab, citing the need for a seamless transition to his successor and the serious issues that the country is facing.

However, since Johnson’s resignation the country has appeared to be rudderless with the Prime Minister taking not one but two holidays during this time as the two candidates to replace him spend time promising tax cuts and additional support payments to woo voters.

By the time Johnson’s successor is voted in and been able to create a new Cabinet, the third quarter of the year will be at an end, and the country will in all probability be in recession.

With inflation now above 10% and looking increasingly likely to top Andrew Bailey’s estimate of 13%, urgent action is needed to provide support to the lowest paid to avert the rising level of industrial action that is not only already taking place but also further strikes through the public sector.

The country’s largest container port at Felixstowe has been hit by a strike which started on Friday, and this will add to the continuing issues with supply chains that have only just returned to normal following the Pandemic.

The latest debate between Liz Truss and Rishi Sunak saw Sunak criticize Truss’ plans for tax cuts, which, he believes, will see inflation rise further and faster as borrowing rises to dangerous levels.

The only senior member of Johnson’s Cabinet not to announce their support for one or other of the candidates, Michael Gove, declared for Sunak over the weekend. While this is unlikely to have any material effect on voters, it will have given a timely boost to the former Chancellor, who continues to trail in opinion polls.

Despite remaining in negative territory year-on-year, retail sales saw an improvement in July. Having fallen by 6.1% in June, sales fell by only 3.4% last month.

This is unlikely to be a continuing trend as shoppers decided to bite the bullet and purchase one off items as prices are unlikely to moderate any time soon.

Last week, Sterling was under severe pressure versus a strengthening dollar. It fell to a low of 1.1792 and closed at 1.1828.

This week’s most significant data release will be seen tomorrow, with the release of PMI data. The most important of this will be the data for services output which makes up 80% of GDP. This is expected to have fallen slightly but remain in expansion, falling from 52.6 to 51.8.

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USD – Powell may use Jackson Hole speech to open up

The Federal Reserve’s annual junket to the luxury resort of Jackson Hole in Wyoming takes place this week.

This is traditionally an opportunity for its chairperson to make a major speech on Central Bank policy.

Jerome Powell will speak on Friday, and speculation has already begun about how he will deal with the continuing rise in inflation. There is no doubt that the FOMC were collectively of the opinion that price rises would have moderated more than they have, given how far monetary policy has been tightened.

It is worth noting that despite the number of increases that have taken place in short term interest rates, the target for Fed Funds is only now at a neutral level. Powell and several of his colleagues have commented that it is likely that the rate would have to be into restrictive territory before it had any significant effect.

With the employment market still adding jobs at a level more often seen as an economy emerges from a recession rather than entering one, the words of previous Fed Chairmen, who believed that every recession is different, will be ringing in Powell’s ears.

The end of the era of low interest rates has now well and truly ended, but questions will be asked about how effective hiking interest rates has been given the pace at which inflation continues to increase.

It has been suggested that rates could have been left unchanged and the Fed could have concentrated on reducing the size of its balance sheet far quicker than it has.

The level of support, both monetary and fiscal, has been blamed for the rise in inflation with President Biden facing criticism for going over the top in providing cash to those in apparent need once too often.

The most recent data for the employment market, last week’s jobless claims number showing that the pace of claims is beginning to moderate, speculation has started that the hoped-for slowdown in the headline non-farm payrolls data won’t happen just yet.

The dollar index saw significant gains last week as risk appetite was affected by the continued conflict in Ukraine. It rose to a high of 108.21, closing at 108.10.

This week, data for durable goods orders will be released. This is an indicator of the long-term health of the economy. Orders for big ticket items are expected to have fallen from 2% in June, to 0.2% in July.

EUR – Line in the sand coming back to bite Brussels

While the single currency has flirted a couple of times so far this year with parity versus the dollar, many analysts and traders believe that the fall that has taken place recently is the prelude to a fall that won’t be reversed in the short term,

There is no doubt that the Eurozone economy is not just the weakest in the G7 currently but faces the most serious negative conditions going forward.

The fact that Brussels was so quick in announcing sanctions against Moscow when the invasion of Ukraine first took place is threatening to come back and bite it.

The European Union remains a hybrid state, with no single voice in the shape of a Foreign Minister or envoy to negotiate at such a time as diplomacy is necessary.

Clearly not wishing to make any military threat has left Brussels in a weak position, particularly exposing itself to an energy crisis.

While Moscow makes excuses for its inability to provide gas supplies at their normal level, the words of Ukrainian President Zelensky that such actions are an act of war, are starting to ring true.

With the ECB committed to a further hike in interest rates at its next meeting, the situation is not going to improve.

Although GDP data is a rear-view mirror estimate, the most recent read for Q2 shows that the economy was slowing down between April and June at a faster rate than had first been realized.

This does not bode well for the rest of 2022 and into 2023, even though ECB President Christine Lagarde still believes that a recession can be avoided.

With Germany staunchly supporting further tightening of monetary policy despite its own economy teetering on the edge of recession, it would be a brave but almost impossible decision to delay a further hike, but it may also be the right one.

The euro looks set to test parity sooner rather than later and it is doubtful that traders will see it as cheap before it tests the low for the year which is currently at 0.9952. Below that point it is hard to see where there will be interest to buy for now.

Last week, the single currency fell to a low of 1.0032, closing at 1.0038.

Data releases are having less effect on the euro now than is seen in other G7 nations but, for the record, figures for composite PMIs will be released and are expected to show continued contraction.