I know a lot has happened these past 24 hours alone so before we dive into it quickly take a look at how the major economies are positioned. Not good at all.
Painful Times Are Ahead For The Uk
As you may have already seen, Queen Elizabeth II died yesterday at the age of 96. A sad moment for millions around the world, but a life well lived if you ask me. ‘Operation London Bridge’ is underway so expect a lot of changes to happen and on top of the Queen’s untimely passing, we’ve had a change within the parliament as Liz Truss took over her predecessor Borris Johnson to navigate the Uk out of what seems to be an unavoidable crisis.
Liz Truss Announces Cap on Energy Bills
Being a citizen of the Uk I must admit the recent weeks have really presented challenges as you hear projected costs of living and the cost of energy jumping by north of 80% from the month of October. Within her first week Liz Truss has sworn to cap energy bills to £2,500 a year for the next two years compared with the figure of £3,548 we would have been paying if not for the energy plan. Now, similar to the Covid-19 relief package there's always a tail-end of any support package, as this energy relief plan is expected to run into the billions for the Treasury. The question is, how will we pay for it all, taxes?
Judging this situation from an unbiased view there’s little one can do to avoid any sort of extreme outcome as the current economic climate has deteriorated faster than one could have predicted leaving two outcomes. One, soaring inflation amidst uncontrollable energy inflation (due to Russia) or two, elevated inflation with more spending/debt incurred to finance such support to Uk Citizens.
The strain isn't just being felt in consumers’ pockets, take a look at cable rates below.
YTD the pound is down 17%, yes 17%. A price point of 1.16
Analysts across tier 1 banks have been calling for the pound to hit PARITY against the dollar! I would have never expected to see that in an analysts report but with the current array of financial conditions unfolding never say never.
With the Bank of England expected to continue with it’s path of hiking there’s realistically only one way this ends, a deep recession within the Uk which resets everything. When glancing at all major economic indicators the picture worsens; the rule is manufacturing is the first industry to take a hit before a recession starts then housing. The reason being both manufacturing and the purchasing of new homes requires one thing. Accessible and attainable credit, which in an environment where rates are sitting at 1.75% and expected to go up only makes it increasingly difficult to finance such projects/ purchases. The knock on effect you may ask? Simple, we see that same conservative and fearful mindset, seep into retail sales as consumers step back on discretionary items flowing throughout the wider economy.
So you end up with lacklustre growth, declining consumer confidence, negative real wage growth and elevated inflation. A perfect recipe for disaster.
ECB Move Aggressively To Fight Inflation Frenzy
Since the GFC of 2008 we have become immune to seeing Euro area interest rates so low across all three rates; however, yesterday we saw an unprecedented hike in interest rates with rates now sitting at 1.25%!
The ECB hiked rates a substantial 75bps taking their deposit interest rate to 0.75%.
After recent events in Ukraine it’s clear to say Putin has got the Eurozone at his mercy; cutting off the Nord stream pipeline and strengthening ties with China & India to redirect gas intended for the Europeans to his fellow trade partners. The second layer affects are due to stretch far and wide.
You may be thinking; it’s only going to affect energy prices and inflation right?
Yes, but think deeper on how the Euro area economy works, what drives its productivity. The ability to attain cheap energy and use that to produce manufacturing goods. What happens when you change the top funnel component which is the golden key? You get a whole new situation which is what the Europeans are awakening to. The central bank only has the ability to control monetary policy not individual, sensitive parts of an economy.
As Ben Bernanke former Chair of the Federal Reserve said:
“Monetary policy is a blunt tool which certainly affects the distribution of income and wealth, although whether the net effect is to increase or reduce inequality is not clear.”
For now, that’s all we’ll cover but next week we’ll take a deeper look at the energy crisis. Thank you for reading, for those who have been sharing thank you as well, we’re seeing an influx of new macro heads!
I would love to hear from you guys, both topics you would like covered and even ideas; you can reach me on Twitter, Instagram, LinkedIn or email.
Until next time (Tuesday) goodbye!
Joe