It feels like I’ve been stuck in a never-ending loop of drama with the Uk; inflation sustaining above the 10% figure, the ousting of Borris initiated by his own cabinet and now the 44-day rise & fall of Liz Truss. Comical to say the least…

In this piece, we take a look at:

  • UK CPI print and what that means for the BoE & the economy

  • An outlook of the Uk markets and investor sentiment surrounding the Uk

As always, lend me your attention

10.1% Inflation, Again…

Yes, again! This is not the first time CPI in the Uk that CPI has touched 10.1%, rewind back to July when we also saw inflation at 10.1%.

Chart 1: CPI Uk '22

If you ask me, things just keep on getting worse for the Uk; and there’s no sign of conditions slowing down. Let me outline to you very simply where we are:

  • YTD cable rates are down 17%, having already breached record lows!

Cable Rates As Of - 21/10/2022
  • The gilt markets have suffered excruciating losses, down >50% from December highs. (You should recognise this chart from Tuesday’s piece, if not, read it here!)

  • The downfall in gilts has created a liquidity shock to Uk markets, thinning liquidity has led to spreads widening across debt instruments & now this has trickled into the wider economy through mortgage rates being re-priced and both short/long term borrowing costs also being increased. Thus the panic we’ve seen within the Uk as the budget deficit becomes larger and substantially difficult to finance.

Long Term Gilt Prices
  • Lastly, but not to be mistaken as not equally important, we have a political stand-up show going on within Parliament reducing the credibility of our Government and the appearance of our markets. Great work Liz…

Back to the inflation.

As it stands within the Uk, rates are sitting at 2.25%, the bond market is predicting rates within the Uk to hover between the 3.5% - 4.0% range in the near term (2-5 years). I personally see the Bank of England hiking rates throughout 23’ incrementally before being forced to start the process of quantitative easing once something breaks; the real question I’m wondering is.

Uk Gilt Yields And Spreads

When is it enough tightening? To that you might answer, Joe that’s pretty simple when inflation is under control; to which I’d then question, what will we have to put markets & the economy through in order to achieve that? Inflation is usually driven by a few very simple factors; accommodative/loose financial conditions, large pent-up demand within the economy and of course increased productivity domestically but also globally as productivity drives growth, growth then drives commodity prices resulting in inflation.

But as we all know, this isn’t textbook inflation. An ongoing war, restricted supply chains caused by continuous lockdowns affecting crucial trade ports that are relied on to satisfy demand and global energy prices through the roof. Just a few factors are at play; all of which have led to our current 10.1% inflation figure.

Luckily the Uk is far advanced compared to the likes of EM (emerging markets) and FM (frontier markets) or else we would have had the recipe for hyperinflation.

Hyper Inflation = Rapid inflation + a collapsing currency leading to a contracting economy

The Great Demise For Liz Truss

This is probably the most accurate representation of what has happened these past 4 weeks.

After only 44 days Liz Truss resigned as PM of the Uk. However, she still walks away with £115,000 per year from the tax payer’s pockets for her ‘service’. What a gig to be involved in.

Rather than diving into the politics I value getting a clear understanding of what is ahead for the Uk and where opportunities may lie.

As a result of consumers’ finances being heavily hit due to cost of living inflation, from the cost of rental property all the way to the average basket of household goods, an expected slowdown in retail sales is already eminent within the economy as fears surrounding a looming recession drags an already weakened consumer confidence lower.

Retail Sales Volumes Fall Below Pre-Coronavirus February 2020 Level

The services sector represents the bulk of the Uk GDP, with declining spending and confidence, both with consumers and corporations the outlook points towards a needed recession.

Now, the question that should be lingering within your head is. What exactly are consumers spending less of their money on now?

Here’s the breakdown. For those who have seen their cost of living go up, the most common lifestyle changes they have made as a result were:

  • spending less on non-essentials (57%, around 26 million people)

  • using less gas and electricity in their home (51%, around 24 million people)

  • cutting back on non-essential journeys in their vehicle (42%, around 19 million people)

here’s the graphical representation.

Source ONS: Lifestyle survey & spending cuts

From a first look, I would begin to raise some red flags if/when the % of adults using credit cards more than usual began to rise rapidly; rising rates and rising credit usage usually end with higher risk and potential for defaults on payments.

Looking forward into the next 6-12 months, the Uk is about to experience further tightening and see a further withdrawal of spending from the consumer as living conditions worsen; sterling has found some feet as Jeremy Hunt, the new Uk Chancellor, has reversed the majority of the mini-budget plan. My focus will be on the upcoming BoE meeting to see their stance after such an eventful Sept/October.

Thanks for bearing with guys I know this piece came out later than usual on a Saturday morning as supposed to Friday! But we got there in the end

As always, share with a macro head and let me know your thoughts!

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Until next time

Joe