Client Update - 2nd September 2022

My apologies that once again my weekly email is dominated by comments from major central bankers on their interest rate policy. The US Federal Reserve (FED) chairman Jerome Powell used his opportunity at the annual Jackson Hole meeting to set out a more hawkish tone on dealing with inflation – stating “we must keep at it until the job is done”. His focus on short term pain to ease longer term concerns gave a firm message that despite announcing last month that interest rates were at neutral, the market is pricing in another 0.75% rate hike in September, before possibly slowing the rate of increase. Equities that have been recovering well since the middle of June took a few steps back on this news, before stabilising in the last 24 hours as we await further data on the health of the global economy, with the US jobs report out today.

The point of focus after that is next week’s policy decision from the European Central Bank (ECB) and after Powell’s comments, it will be interesting to see if the current expectation of a 0.5% rate rise is correct, or with Eurozone inflation now at 9.1% (representing the highest level of inflation in the 23 year history of the Euro) whether they will go higher.

Also in the headlights for next week is UK politics as the next Prime Minister is announced and they will quickly turn their attentions to the growing cost of living crisis and the winter fuel bills. It has already been declared this week by the Office for National Statistics (ONS) that the £400 government discount to help households in the UK with their energy bills this winter will not lower inflation – that is currently expected to rise to 13% by October. If the ONS had decided to include this payment in their calculations, it would have reduced the inflation figure by some 2%. Over the past week economists have been updating their inflation forecasts to reflect the 80% rise in typical energy bills from £1,971 to £3,549 in October. Citigroup has now increased its inflation forecast to 18.6% in January 2023.

The effects of this inflationary environment are being felt far and wide, with more union strikes around the corner and schools reopening with staff shortages for the new term. What a first week it will be for our new Prime Minister, as some fairly drastic action is required, and quickly to help the cost of living crisis in the UK.

Next week looks very interesting indeed, until then, I trust that you are keeping well, and please do have a good weekend.