How bad could it get?
View from the Trading Desk:
If things weren't already bad enough, the UK is now bracing itself for a summer of industrial action after last week's RMT strikes brought the country's railway system to a standstill. Just this morning, Barristers walked out of court in a dispute over pay and conditions. Broad similarities with 1970s and 1980s Britain are hard to ignore. The cost of living has not been rising this fast since the Falklands War, public finances are unsustainable, and more unions have threatened strike action over the summer. All of this is unfolding alongside the trade turmoil caused by the UK's exit from the European Union. For the average UK household, confidence has plunged to the lowest since records began, with the UK economy set to shrink in the second quarter.
Source: GfK via Bloomberg
It's clear to see how the perfect storm of Brexit, Covid-19, and Russia's invasion of Ukraine has exposed the UK's thinly shelled economy. Successive governments have failed to combat age-old structural issues stemming from Thatcher-era policies. Most recently, Boris Johnson's administration has failed to deliver their promise of 'levelling up' the poorer parts of the country, with output-per-hour in London and the South-East massively outperforming other regions. Business investment has also failed to grow since the UK voted to leave the EU, an indication of the uncertainty many firms face.
The pain is likely to worsen for many in the coming months, with no sign of falling food or energy prices. Meanwhile, the Bank of England looks set to tolerate a period of economic decline to get prices under control.
Bottom line: Britain is facing both immediate and longer-term economic challenges. The former are more global in nature but have highlighted existing fragilities. For the Pound, this has played out in a new wave of weakness whereby mid-high 1.20s against the US Dollar could start to look like appealing levels at which to buy.
The week ahead
The Pound Index has been trading flat over the last week as a downbeat UK economic growth outlook and rising prices keep consumer confidence subdued, with any sustained rally in the currency limited. Markets are laser-focused on when the UK will enter a recession, or whether it will at all, with Barclays suggesting a tight labour market and fiscal packages could help support the economy. Huw Pill, Chief Economist at the Bank of England, has warned that the tightness in the labour market could create prolonged inflationary effects if wages begin to rise. UK Sovereign yields were higher across the board this morning, while the FTSE 100 has been up 0.50%.
- Bank of England Governor Andrew Bailey is due to speak at the European Central Bank Forum on Central Banking this Wednesday at 2:00PM.
- The Nationwide House Price Index m/m for June is forecast to come in at 0.5% after the May figure read 0.9%.
- Mortgage approvals for May are projected to increase by 64.0K, following growth of 66.0K in April.
- Final GDP growth data for Q1 2022 and the final Manufacturing Purchasing Managers' Index for June will also be released. Both prints are expected to be unchanged.
Risk-on sentiment has helped to boost the Euro, with the common currency trading 80 basis points higher against the US Dollar since the start of trading last week. Economic outlooks in the Eurozone took a hit as France and Germany's Purchasing Managers' Index data surprised to the downside. However, they managed to hold above 50, indicating the respective economies are still in expansionary territory. Markets are uneasy about the hawkish tilt from the European Central Bank as fears of rising borrowing costs in weaker European economies threaten fragmentation. This puts the ECB in the tricky position of trying to rein in price rises while also managing a potential blowout in government bond yields. European shares are trading higher this morning while the G7 meet today and Tuesday.
- ECB President Christine Lagarde will be speaking at the ECB Forum on Central Banking throughout the first half of the week.
- German preliminary Consumer Price Index m/m for June is forecast at 0.4%, with the year-over-year figure expected to reach 7.9%.
- The June Unemployment Change in Germany is projected to read -5.0K versus -4.0K in May.
- Eurozone preliminary CPI m/m will be released to close out the week, with analysts estimating a 0.7% print, taking the year-over-year rate to 8.5% in June.
US Dollar strength has waned as markets regain some bullish sentiment heading into month-end. The US Dollar Index is down 0.75% in the last six trading days. Federal Reserve Chairman Jerome Powell has been vocal that there are few signs of a slowdown despite a miss on PMI releases last week. Economists at Goldman Sachs anticipate a shallow recession, but this is not the baseline case, with the more likely outcome to be below-average growth. The US ten-year Treasury yield moved higher this morning to trade at around 3.17%, following a two-week downtrend from its year-to-date high. US stock market futures are pointing to a muted open today following a strong rally on Friday, which saw the Nasdaq pick up over 3%.
- Conference Board (CB) Consumer Confidence data will be published tomorrow. Analysts are expecting a 100.0 print for June versus 106.4 in May.
- The Federal Reserve's Jerome Powell will participate in the ECB Forum on Central Banking this Wednesday.
- May data for the closely watched Core Personal Consumption Expenditures Price Index m/m will be released on Thursday. Projections point to a 0.4% print to follow 0.3% in April.
- The ISM Manufacturing PMI for June looks set for a decline, with surveys indicating a 54.7 reading, down from 56.1 in May.
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