6 June 2022: Jubilee masks economic meltdown

Rate hike may produce the Coup de grâce

The UK economy looks likely to slowly slip between the waves, as multiple headwinds combine to contribute to a recession which may arrive by the end of the next quarter.

Activity, particularly in the services sector, is expected to drop into contraction, while the actions of the Bank of England at its next meeting, which takes place next week, could be the final straw. Any delay in hiking rates again, would mean that Andrew Bailey would probably be accused of ignoring his duty.

Questions are being asked about the ability of the Prime Minister to remain in power, as rebels within his own party appear to be lining up to challenge.

The Chairman of the Parliamentary Conservative Party will need to receive 54 letters or emails from Government MPs demanding a vote of confidence, in order for such a ballot to take place. in order to force a vote of confidence.

Battle lines are already being drawn, with rebel MPs calling on Boris Johnson to resign to avoid the ignominy both personally and for the Government of their leader being forced from power.

Transport Minister, Grant Schappes, countered yesterday that if there is to be a leadership contest, bring it on, since Johnson would be certain of victory.

Johnson has fallen from a Prime Minister being hailed as virtually unbeatable, to a figure of ridicule in the press.

The weekend’s celebration of the Queen’s Platinum Jubilee united the nation behind the Monarch, but there is no such unity over the cost-of-living crisis, and the degree of goodwill that was engendered by the Chancellor’s recent package of measures has very quickly dissipated.

There remains confusion about what is being paid to who and when the payments will be made.

Last week, the pound closed below the 1.25 level, undoing the rise seen in the previous week. It closed at 1.2489, having been as low as 1.2458.

This week, there will be a further survey of services output released. The S&P Global/CIPS Services data will be released tomorrow with a fear that despite expectations that it will be unchanged at 51.8, it could come in closer to the crucial 50 level or even slip just below.

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Tight labour market having little effect on growth

Friday’s release of the Employment report for June, brought a surprise, but not the one that the market had been fearing. The headline number for new jobs created came in at 390k, continuing the strong reports that have been seen recently.

Although there is assumed to be a continued tightness in the labour market, job hopping seems to remain an issue.

Wages remain a significant contributor to inflation as the FOMC continues to tighten monetary policy.

The employment rate remained at 3.6% while participation remained at 63.6% despite market expectations of a minor fall.

Businesses are still reporting a fall in inventories as the supply chain issues created by the Pandemic remain, although their effect is greatly reduced.

Data for services output was also released on Friday and this showed a significant fall, from 57.1to 55.8. While this is a significant fall, it is unlikely that this will continue for longer than a couple of months, leading to a rise in the degree of confidence that the U.S. will suffer a recession.

The NFP data served to confirm that the FOMC will hike by a further fifty basis point at its meeting next week and the reductio in the size of its balance sheet will begin to be reduced.

Also, this week, data will be released for the country’s trade deficit. It is expected to be reduced from last month, falling from $109.8 billion to $89.85 billion.

The major data release for the week will be the consumer price index. It is expected that headline inflation will fall from 8.3% to 8.2%. This is unlikely to have any effect on the Fed’s actions.

Last week, the dollar index began to recover from a couple of tough weeks. It rose to a high of 102.73, closing at 102.16.

With next week’s FOMC meeting pretty much a foregone conclusion, the market will expect some advance guidance from Jerome Powell as to the committee’s view on the fact that inflation appears to be topping out.

A hike this week isn’t out of the question

This week, the Governing Council of the European Central Bank will meet to discuss interest rates. While advance guidance suggests that there will be a hike in rates at the July meeting, recent economic data releases increase the possibility that the hike could be brought forward to this week.

Inflation is continuing to rise to unprecedented levels, which is contributing to a cost-of-living crisis in several countries, while low interest rates remain an issue in the wealthier countries where savings and pension pots are being severely denuded.

Rising prices in several countries like Spain and, in particular, Italy has, in the past been seen as a fact of life, but that was under a different financial regime, but now, they now have no opportunity to allow their currency to fall. The only opportunity now is for social spending to be cut to levels that will be very unpopular.

There are a few rumblings, especially in the east, concerning the benefit of remaining members of the European Union. Several nations joined in order to protect their security from Russia, but the lukewarm response to Russia’s invasion of Ukraine has had a severely damaging effect.

Hungary continues to disagree with the policy on sanctions that is being discussed in Brussels, and there is a feeling that while such actions can be justified morally, there is a real question about the effect on the entire EU economy once summer is over.

While there is a possibility that there may be a hike this week, ECB President Christine Lagarde hinted that it will come on July 1st.

She still expects inflation to settle around the 2% target level in the medium term, but that may need to be facilitated by a fifty-basis point increase followed by one or two further increases of a similar level.

Last week, the euro fell to a low of 1.0627, but recovered to close at 1.0716.

This week’s ECB meeting will dominate the outlook, employment data and a further release of preliminary GDP data may also affect the currency.