31 August 2022: Inflation could top 23%

GBP – Goldman Sachs prediction based on continued energy crisis

U.S. investment bank Goldman Sachs has gone even further than its Wall Street rival Citibank in predicting that inflation in the UK could reach 22% next year.

Last week, Citibank made a prediction that price rises in the UK could top 17% but Goldman believes that the energy crisis could push inflation even higher with the Bank of England helpless to bring it back under control.

The hospitality sector, which is only now recovering from the battering it took during the Pandemic, is facing further devastation with its trade body writing an open letter to the Government yesterday pleading for assistance with the warning that pubs and restaurants could be forced out of business as they face up to 400% increases in utility bills.

There is no energy price cap for commercial enterprises, so the sector faces the full force of the continued rise in gas prices.

The letter went on to say that owners are now unable to pass on increases to their customers, as they will lose up to 80% of their business. Already faced with their own fears over energy cost, consumers are unlikely to spend an evening in a pub or restaurant if prices rise out of hand.

The potential crisis in the hospitality sector comes as the shortage of staff has pushed wage demands to new highs. The effect of Brexit continues to be felt with businesses in City areas unable to hold onto staff who are job hopping, making ever-increasing wage demands.

The new inflation prediction for Goldman Sachs is based upon their prediction of another major hike in the energy price cap in January. Consumers are still reeling from the 80% hike that was announced last week and will take effect on October 1st.

The rise of the use of food banks since the Pandemic began is set to be eclipsed by a new phenomenon as more and more people fall into energy poverty.

Warm Banks are set to spring up all over the country with community centres, churches and other buildings welcoming those who are unable to keep their own homes warm.

It seems that there is a new addition to the crises that threaten to overwhelm the country for the new Prime Minister to contend with as he or she takes office next week. It is hoped that the first item on the agenda of either Liz Truss or Rishi Sunak will be to announce both temporary and permanent support for those most in need. Truss is believed to favour targeted support, while Sunak believes in another blanket payment.

The financial markets returned from Monday’s holiday and brought an increase in volatility. Sterling fell to a low of 1.1621, closing at 1.1654 as the dollar continued to gain strength.

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USD – Job openings and jobless claims predict another strong NFP

The run-up to the release of the monthly employment report provides several clues to the strength or otherwise of the report, although the markets are still often caught off guard.

With weekly jobless claims appearing to have topped out at around 250k, this week will see several indicators. Yesterday the monthly figure for job openings was released and this showed a significant rise in vacancies as well as a significant upwards revision of last month’s data.

The June figure was upwardly revised by more than 300k, while another 199k opening was seen in July. Given the strength of the headline non-farm payroll figure last month, the JOLTS increase released yesterday should see a further significant increase in new jobs when the August Employment Report is released on Friday.

Currently, the market’s prediction is for 300k new jobs to have been created after 528k in July.

The Chairman of the Federal Reserve, Jerome Powell, has already shown in his keynote address at the Central Bank’s Symposium last week, that the tightness of the labour market will lead the Fed to continue to raise interest rates.

At its next meeting on 21st September, there will be some serious debate regarding whether another seventy-five basis points should be added to the Fed Funds rate, or, as some members of the FOMC have indicated, a taper of the increase to fifty basis points will suffice.

Given that Powell is still determined, almost by force of will, to deny a recession is coming, he is likely to hold sway later next month. Powell’s belief in the ability of the economy to recover from a soft patch, while still a majority view, is now being questioned by some prominent economists.

With globalisation playing an ever more prominent role in domestic economies, the decoupling of the world’s two largest economies, the U.S., and China may be the difference between a recession and a continued, albeit sluggish, recovery.

China has recently been seen to cut interest rates as its economy struggles to break free entirely from the effects of the Pandemic. Although it is far from open about the full extent of its economic outlook, there is no doubt that there is and will remain for some time, a significant link between the two economies.

The dollar continues to gain strength from rising risk appetite as well as outlook for monetary policy. Yesterday, the index rose to a high of 109.11, but fell back to close virtually unchanged at 108.82.

EUR – Consumers facing a tough winter with no respite

The latest release of consumer confidence for the Eurozone showed an unchanged reading of -24.9. This has been constant over the past three months, as the economy has been hit by the war in Ukraine and the continuing rise in the price of energy.

In truth, there has been extraordinarily little to cheer the population of the region since it emerged from the Pandemic. Living standards in the stranger economies have been significantly affected by rising inflation, while in the weaker, more indebted nations, a debt crisis has been looming since the withdrawal of the ECB’s implicit guarantee.

The debt markets were only supported by the Central Bank, which quickly became the only buyer of debt at a price which those nations could afford to pay.

Since the ECB withdrew, activity has dried up despite the new tools it created to ensure that spreads between German issuance and the rest of the Eurozone don’t blow out.

The mood hasn’t really worsened, despite the dire threats that have been made recently about the coming energy supply crisis. This is more of a sign that confidence is about as bad as it can get, although there is unlikely to be any upswing for several months.

ECB Chief Economist, former Bank of Ireland Governor Philip Lane, spoke yesterday about his fears for a slowdown in the economy. He feels that there could be a technical recession but doesn’t see anything more serious than that.

This is taken almost word for word from the Fed’s play book, although it is likely that Jerome Powell could say it with considerably more confidence than Lane.

The ECB Economist’s use of words like mild and temporary to describe the downturn in the economy belie what is actually predicted to happen in many sectors and nations of the region.

With interest rates likely to be increased possibly by a further one hundred basis points, at least, in the current round, it is hard to see what could spark a recovery even in the medium term.

There has been a sense of fantasy, or at least extremely wishful thinking, around the Eurozone economic performance ever since it withdrew support for the economy in order to begin to tighten monetary policy.

The euro has seen an entirely predictable fall over most of 2022, but the market still doesn’t appear to want to push it too far below parity yet. It may be that the rise in the dollar index is seen as a little overdone and this is spilling over into support for the single currency.

Yesterday, it scrambled back above parity, reaching 1.0054 and closed at 1.0014.