29 December 2022: Hospitality facing a perfect storm

29 December 2022: Hospitality facing a perfect storm


  • Economic sickness linked to long term health conditions
  • Fed inducing a synthetic recession
  • Emerging energy crisis to drive recession
GBP – Market Commentary

Food, power and staff creating a unique situation

The most significant change in the employment market since the Pandemic has not been the departure of EU workers following Brexit, but the number of people citing long term sickness as the reason they are either not working currently or not actively looking for work. This is an additional burden for the NHS, as they are also one of the areas of the economy that are most hit.

The hospitality sector was one of the areas of the economy that was most hit by the Pandemic. It is estimated that over 400 pubs in England alone have been forced to close.

This sector has been hit by a perfect storm of factors that make survival a struggle, let alone thriving and making profits.

The cost of energy has risen exponentially, the price of basic foodstuffs has doubled in some cases, while there is also a scarcity of a number of ingredients, and then there is the continual issue of staffing.

These issues combined have made an evening at the pub a luxury which many cannot afford.

Several establishments have reported cloning early in the evenings or limiting the number of days during the week that they open in order to cut costs.

There doesn’t appear to be any respite on the horizon as energy prices are likely to remain high for the next two years, the war in Ukraine shows no sign of coming to an end, while it is unlikely that the UK will rejoin the free movement of people that is enjoyed by the European Union.

Industrial unrest will continue for at least the first quarter, with new strike dates announced and fresh sectors of public sector workers joining almost daily.

Yesterday, the pound traded in its well-trodden manner as ranges have narrowed due to the Holiday season. It is to be expected that the market will begin to pick up next week as new themes are explored.

Along the data releases due next week are manufacturing and services output, and house price indices.

The composite index of output from manufacturing and services combined is expected to slip into contraction.

USD – Market Commentary

The housing market is slowing dramatically

Yesterday, I detailed how the employment market is confounding several analysts’ view that job losses will begin as the Federal Reserve takes short-term interest rates into restrictive.

Today, I will focus on the prospects for the broader housing market. Although Regional Federal Reserves are reporting widely different data, there is no doubt that all areas of not all regions of the country are affected.

The most obvious effect is a slowdown in activity in the sale of houses. Potential sellers are more likely to stay put and possibly add extra room to existing homes given the rise in home loan interest rates, while first time buyers have to adjust their budget and affordability.

House building has slowed dramatically as the cost of raw materials has risen substantially, while the builders themselves face a squeeze on their working capital. In the past they would halt building as costs rose, but that is not viable in the current environment, so they are offering heavy discounts as they try to cut their losses.

There will eventually be a knock-on effect on employment in the sector, but the mobility of workers in the sector has stopped this from happening.

Rental values have remained high, especially in the commercial sector, and this has added to core inflation as rent, not mortgage payments, are included in the inflation data.

The latest PCE data has shown that inflation is continuing to fall, although the Fed tries to look at a much broader picture in order to decide on monetary policy.

Now that rates are restrictive and the Fed’s bias is still towards tighter monetary policy, inflation should fall fairly rapidly. At least, that is the normal outcome, but over the past year the economy has been difficult to predict.

The dollar index is bumping along the bottom of its recent range. It is not currently attracting any buyers who consider the current level to be cheap. But neither are there any sellers in the picture who feel the correction has further to travel.

EUR – Market Commentary

Gas and electricity prices will push economy into recession

The European Commission has announced a cap on gas prices after weeks of what were considered emergency talks. One of the major criticisms of the entire union is the length of time it takes to make a decision and the impossibility of trying to reach a consensus.

With Russia having cut off the majority of its supplies of gas to Europe, it is hard to see how the entire region can avoid a recession, although there may be some pockets of expansion where industry is not a factor.

The entire 27 nation union enjoys a plentiful supply of labour, but as has been seen in the UK, the willingness to be mobile is beginning to fall away as more and more workers rely on social benefits.

Spain is one of those nations that are suffering. Tourism is a main staple of their economy, and the work available is mostly seasonal. This puts pressure on the Spanish Government to provide for its population during the winter months.

Thankfully, Spanish energy usage is among the lowest in Europe, which is seen as a benefit.

Italian addiction to public spending is showing no signs of abating, as the new Government strives to provide a stable quality of life.

At some point, Brussels will finally get around to realizing that financial discipline needs to be maintained in good times and bad and try to rein in Rome’s out of control budget deficit, which is currently in excess of 100 billion euros.

Total borrowing is close to 2.75 trillion euros and with rising interest rates is rapidly becoming unaffordable.

The single currency is drifting, mostly affected by the likely size of future interest rate hikes. The last hike was of 50 basis points, although it is rumoured that it was close to being 75. The next meeting of the Governing Council will be on January 25th.

Have a great day!

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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.