Client Newsletter – 25-10-21

Written by: David Comber
Date posted: 25.10.21

It was another buoyant week for sterling last week. Amidst all the previous uncertainty about the potential “stagflation” of the UK economy, the pound continues to remain strong. Having had growth figures for August two weeks ago showing a 0.4% rise (month on month) in GDP, and unemployment still coming down, inflation figures stabilised slightly too.

Against a forecast of 3.2%, the actual consumer price index (CPI) figure came in at 3.1%. So does this figure cool the current inflation concerns and the subsequent likelihood of an interest rate rise? In a word, no!

Looking at the fact that CPI figures are measured on a year-on-year basis, it is important to consider where we were last year first. With the “Eat Out to Help Out” scheme in August 2020, prices fell before a rise in September as the scheme came to an end. That rise is being credited as the main reason why inflation figures did not continue the considerable rise seen since March of this year.

For now at least, the Bank of England’s next monetary policy meeting on 4th November is incredibly important. The BoE could well be forced to act to cool inflation, by increasing the interest rate for the first time since June 2018. Doing this before they stop injecting money into the economy is a bold move in itself, but markets are currently looking at a high probability (80% plus) of that happening. Such a possibility has continued to drive GBP versus the Euro, as seen in the chart below from last week.

If recent movements for GBP-EUR have been working in your favour, do reach out to the team to discuss how we can help you lock these prices in for the coming months on a forward contract. Prices can move back the other way just as quickly as they rise, as we saw on Friday afternoon with GBP losing around half a per cent across the board.

Friday was the main significant day of data releases this week. The muddy outlook for the UK economy continued with retail sales for September showing a month on month fall of 0.2% versus the expectations of an expansion of 0.6%. Four out of the last five months have seen a drop, with concerns that any nudge up in interest rates may cause further weakening in high street spending. Another reason why the Bank of England are under pressure to get their decision right on the 4th of November.

That said, the monthly manufacturing and services sector figures for the UK economy continue to show positive numbers. This is at least some relief. Most of the equivalent Eurozone figures show growth too, whilst manufacturing numbers generally are still being held back by the shortage of semiconductor chips, which hit the automotive sector hard in Q3. UK September car sales were their worst since 1999, leading to an increase in second hand car prices. This will also have a considerable effect on inflation as seen in the US over recent months.

Speaking of the US, Friday afternoon finally saw Jerome Powell declaring he thinks it is “time to taper” the Fed’s massive bond-buying scheme. The Governor was speaking at a virtual monetary policy conference when he gave the news which markets have been awaiting for a very (very very) long time. He made it clear though that the Fed have no intention to raise interest rates, until the US economy has reached full employment and is in line with the 2% inflation target. “We think we can be patient and allow the labor market to heal”, was the main takeaway line. Approximately 50% of Federal Reserve members are now foreseeing an interest rate rise in 2022. The news caused the Dollar to wobble a little as seen in last week’s chart below:

So into a spooky final week of October. Before we even get to Halloween, it will be time for a bit of “trick or treat” courtesy of Rishi Sunak’s Autumn Budget on Thursday. Looking at the big picture of the UK economy at the moment, I can’t foresee there being a lot of treats on the table in this one. General expectations are for the Government to need to borrow a further £180bn this tax year. This is on top of government borrowing of £320bn in the previous tax year, the highest figure outside of wartime.

Changes to taxes for businesses and individuals are widely expected, with VAT possibly being reduced on energy bills, graduates might be asked to pay student loans back earlier and widespread spending cuts. However, fans of sparkling wine might be one of the few groups who see their favourite tipple become cheaper.

The various changes in policy will be important for markets to digest, as will the report published in parallel from the Office for Budget Responsibility (OBR). This gives more information on how the economy is performing, which as we all know is not likely to paint a pretty picture. The House of Lords is more likely to be a House of Horrors.

In an all-action Thursday, the latest European Central Bank meeting takes place just after the Autumn budget. Unlike the Bank of England and Federal Reserve, the ECB are going to be leaving all their different tools as they are for now at least. They too believe inflation is transitory, on which note Eurozone flash inflation figures for October are forecast to keep heading up to 3.7% from 3.4% last month. Inflation is still very much a concern across the globe.

To avoid any Halloween horrors of your own, do reach out to the team this week to discuss your requirements. GBP-EUR for now is still at fantastic levels for Euro buyers, and whilst expectations are of an interest rate rise in ten days’ time from the Bank of England, that could all change. Equally, Sunak’s briefcase of skeletons and cobwebs could certainly be an eye-opener come Thursday.

Have a great Halloween week (excuse the puns)!