Your weekly economic update from the team at FXD Capital
January inflation in the US reached 7.5%, eclipsing forecasts by 20 basis points. The 40-year high level has been in the crosshairs since the turn of the year, so it is not a complete surprise. The fact the final print beat the forecasts is more pertinent and suggests that the “wave” still has further to go before quelling.
Aside from the factors contributing to inflation mentioned ad nauseam, falling jobless claims should not be understated as a factor. For three straight weeks now, US jobless claims have been falling. While those on unemployment aid still stand at 1.621 million, the numbers returning to work (and, thus, greater spending power) since the Omicron wave are adding more money velocity into the economy.
The S&P 500 contracted 1% after the news, and the two and ten-year treasury benchmarks hit 1.48% and 2.00%, respectively. Anticipation for rate increases abounds and calls for a significant shift in rates, by 0.50% at a minimum, get ever louder.
Following record eurozone inflation last week, the ten-year German bund continued its recent rise to a heady 0.26%. For a long time, bunds were trading at negative margins; while such a paltry return for a ten-year investment seems disingenuous, it’s necessary to put the current rates within the context of prime eurozone-denominated yields over the past decade.
In the UK, a £9 billion scheme was announced late last week to assist households in coping with a surge in energy bills. Regulator Ofgem forecasts that an average annual household bill will increase to £1,971, up by 54% on 2021 prices. However, the scheme may not likely have a material effect, with the first tranche giving a £150 council tax rebate for households in the A to D band. The second (and more significant) tranche will only arrive in October, corresponding with the increase in energy price caps.
The issue with energy prices is that households (and, indeed, the country) have little sovereignty or control over supply and, thus, costs. First, by October, the world will be markedly different to now, and you can toss a coin about whether that means prices will be higher or lower. Second, the energy market is now significantly less competitive than it was a year ago. At the same time, most of the now-bankrupt emerging energy providers were profligate with their spending and impervious to the concept of “hedging”, those that prevailed are going to be less inclined to innovate or encourage competitive pricing.
Moving the UK to a self-sufficient and renewable energy nation is a case of evolution over revolution. Unfortunately, the price cap system means it only seems likely that such scenarios will play out over the long run. In the absence of space, abundant sun and raging torrents of waterfalls in the Pennines, the options are limited, and inertia over nuclear programs will drag on, seemingly, for infinity.
Since the Bank of England raised base rates last week, small activity trickles have been noticed in the market. NS&I schemes corresponded to the change with 15bps increases in core products, albeit only to bring them in line with the base rate. However, high street banks have broadly called bluff in terms of moving quickly to pass on the increase to depositors, with only regional building societies displaying any urgency.
It seems like the ceremonial end of Covid-related restrictions in the UK at the end of this month may bring about a line in the sand moment for the economy to take stock. With budgets approaching, there appears to be both reluctance and optimism to move forward past the ceremonial curtain call of two years of restrictions ending. The hesitation is coming from the warm blanket of costs coming secondary to safety and the optimism from entering the great unknown of whatever comes next.
All the best for the week ahead
Alex
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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