10 August 2022: Household energy bills to top £4,000

10 August 2022: Household energy bills to top £4,000

Household energy bills to top £4,000

10th August: Highlights

  • UK to import US gas
  • Can the Fed pull off a miracle?
  • German public wants a greater amount of control over ECB actions

GBP – A third rise in the energy cap is expected in January

The first task the new Prime Minister will face when he or she is elected early next month will be to decide what support will be provided to offset the second and third increases in the energy cap.

It is predicted that household energy bills will reach £4,250 in January, which will drive more families into poverty and ensure that inflation reaches at least the 13.5% predicted by Bank of England Governor, Andrew Bailey.

Another union representing workers in the public sector announced yesterday that it had received approval in a ballot for strike action. 115,000 postal workers will strike in around two weeks’ time, in support of their demand for a pay increase that reflects the current cost of living.

The Communication Workers Union has rejected the 5.5% increase offered by the Royal Mail and will strike on 26th and 31st August and September 8th and 9th.

A spokesman for the Union commented that the workers are demanding a dignified and proper pay rise to ensure that they do not fall behind the cost of living.

Leadership contender Liz Truss is continuing to promise tax cuts as the first thing she will enact if she is elected, including the reversal of the increase in National Insurance that was announced in Rishi Sunak’s final budget.

She believes that this is the only way to save the economy from a long and damaging recession. Market commentators are beginning to agree that the economy is a more serious concern than inflation, which is not reacting to hikes in interest rates in the manner expected by the Bank of England.

The UK energy sector, trying to wean itself off any dependence on Russian gas supplies, is looking west as an alternative. Energy firm Centrica has struck a seven-billion-pound deal with US energy firms to buy liquified natural gas. Centrica owns British Gas, which is the largest supplier of the domestic market in the UK.

The retail sector is already beginning to face up to a slowdown in activity and faces a difficult time in the run-up to the end of the year as it attempts to protect both its margins and its competitiveness.

The peak in the cost of living is expected to hit just after Christmas and this means that retailers will face a squeeze on activity as they go into their busiest period of the year.

It remains to be seen how much support the Government will be prepared to offer, but outgoing Prime Minister Boris Johnson has already commented that his successor will have little choice other than to provide significant new support.

The pound is drifting since there is nothing new to provide traders with any incentive. Yesterday it reached a high of 1.2130 but again fell back, in an all too familiar manner, to close at 1.2079.

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USD – Administration refuses to accept a single denominator

The Biden administration refuses to accept that the US is in recession, despite the economy meeting the standard criteria of two consecutive quarters of contraction.

This theory has never been challenged before since it has been considered the highlight of the culmination of other factors like emergency rate cuts, falling employment and business failures.

On several levels, the economy is doing reasonably well. The largest reason for optimism is the fact that the economy continues to produce new jobs.

That is true from a superficial perspective, but when the data is analysed more closely, there is little expansion in the market, the participation rate is constant at around 62% so the new jobs that have been created are from workers moving between jobs in search of a bigger pay cheque.

It used to be true that the economy was close to full employment when the unemployment rate was art, or around 5%, but that is no longer true. The current unemployment rate in the US is 3.5% and continuing to fall.

Productivity fell for the second consecutive quarter according to data published yesterday. However, this feeds into labour cost data, which means that inflation will continue to rise.

Productivity fell at an annualised rate of 4.6% in the second quarter and renders talk of no recession redundant.

Despite falling productivity, unit labour costs rose by more than 10% in the same period. Despite advances in technology that are reducing the reliance of several sectors of the economy on labour, employment costs remain the single most significant expense for industry.

With unit labour costs running at five times the Central Bank’s inflation target, Jerome Powell and his colleagues on the FOMC appear to be hardly making a dent in rising prices.

Today will see the release of the latest data for consumer prices. While the headline is expected to moderate slightly as the cost of oil begins to fall, the core is likely to see a small increase.

Headline inflation is expected to fall from 9.1% to 8.7%, while the core is likely to have risen from 5.9% to 6.1% year-on-year, although the month-on-month will also have fallen slightly.

The dollar index remains in the summer doldrums. Yesterday, it fell to a low of 105.95 and closed at 106.26.

EUR – No matter, a recession is already underway

The ECB is likely grateful for small mercies, as one indicator of market confidence rose according to data released yesterday.

Investor morale has been falling for several months. It remains in severely negative territory but rose slightly from -26.4 to -25.2. There is no significance to this other than to see that confidence has now fallen as far as it is possible to go.

Despite the recent increase in short term rates, The ECB is continuing to pump billions of euros into the weakest of its economies. Italy, Greece, and Spain received a total of almost twenty-five billion euros in June and July.

This is despite the Greek economy being expected to outperform, growing by 6% in 2022. This is of course relative to the previous year, when its tourist industry was decimated by the pandemic and continued lockdowns. By way of contrast, Athens expects inflation of average 13% this year.

Those who favoured the UK’s departure from the EU are almost rejoicing at the plight of the Eurozone economy, despite the fact that the knock-on effect will add to any slowdown in the UK. The eurozone remains the UK’s biggest export market, and there is no benefit to be derived until the effect of Brexit on UK export markets has been fully realised.

With most of Europe now on annual leave, there is not expected to be any significant change to ECB policy or its actions on inflation before its next meeting, which doesn’t take place until September 8th.

It is likely that interest rates will be hiked again but that is unlikely to be sufficient to have any effect on inflation. This is particularly true when several nations are continuing to be generous in social provision to offset the cost-of-living crisis that threatens to engulf the region.

The euro remains under pressure, but until the market can galvanise itself to build some downside momentum, the single currency will continue to drift, only attracting sellers on ant rally.

Yesterday, it climbed to a high of 1.0247 but fell back to close at 1.0212.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”