Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown: ’Fears that the conflict in Ukraine could escalate after a Russian missile appeared to hit a village in Poland, a NATO member country, have held back gains on global markets. Although there will be reassurance in words from Joe Biden that it was ‘unlikely’ to have come from Russia.
U.S. stocks appeared to be regaining their mojo as hopes careered higher that the rollercoaster ride of interest rate hikes will start slowing sharply after U.S. producer price data came in lower than expected. But stocks retreated after an intense attack on Ukrainian cities spilled over into Eastern Poland. This bombardment, which appears to be retaliatory, strikes after losses in Kherson and condemnation of Russia by many leaders at the G20. This demonstrates the ongoing risks the conflict could develop into a wider war with NATO.
Although the nuclear threat still appears minimal particularly given the U.S./China warnings to Russia this week, an intensifying conflict could exacerbate inflationary pressures, which had showed some signs of easing with a UN deal to allow grain ships across the Black Sea. It’s clear the Biden administration wants to stop an escalation occurring which is why the diplomatic communications have been vague about exactly where the missile is thought to have been fired from.
The U.K. is reeling from yet another super-hot inflation reading of 11.1% as soaring food and energy prices take their toll on household budgets. The jumps in the cost of essentials have been showing up on grocery bills for some time and now it’s made clear with the stark 16.4% rise in food inflation, the highest since 1977. It seems we are in a seventies time warp with runaway food prices, public sector strikes crippling services, and worries about energy supplies. The constant march upwards in prices is increasingly painful for consumers and companies, and for now shows little sign of quickly abating.
This is difficult reading for Bank of England policymakers, as inflation is clearly proving sticker than they forecast. They are now likely to vote for another rise in interest rates at the December meeting, although expectations of another super-size hike still remain lower. So, a rise of 0.5% is on the cards next month with more to come with rates forecast to rise to around 4.5% - 4.75% by the middle of next year. With a two-year recession looming, and unemployment already rising slightly to 3.6%, deflationary pressures are set to emerge. Lower gas and grain prices on international exchanges should also feed through as long as the Russia situation does not deteriorate. The risk is that if the Bank squeezes monetary policy too tight, the recession could be deeper.
In the U.S. there is growing recognition that higher interest rates will linger for longer, and will keep going up incrementally, but the end of the front loading of big rises appears to be in sight. That sentiment was bolstered by comments made by the Atlanta Fed Governor Raphael Bostic, about how slowdown in the price rises of goods offered glimmers of hope.
A slowdown in the economy will be the price to pay to bring inflation under control but with light being glimpsed at the end of the tunnel it’s helping to boost optimism. The HL investor confidence index rose by 31% overall between October and November, as indices have edged back upwards.
However, confidence in U.K. economic growth has plunged by 12% since last month as the repercussions of the disastrous Trussenomics mini-budget mounted up and recession warnings have become louder.
Budget countdown
The countdown is on to the Autumn Statement, and the Chancellor seems ever more fixed on forging ahead with a strategy to claw tens of billions of pounds in revenue from taxpayers. This determination to plug a hole in the government’s budgetary bucket was evident as he highlighted that the treasury has had to pay £22 billion in debt interest this year compared to last, as interest rates have risen, and investors expect more tightening to come. Although gilt yields have come down sharply from the dangerous highs reached following the disastrous Trussenomics mini-budget, the U.K. is still languishing under a risk premium. The government is clearly under pressure to take tougher action than it may have had to do, had September’s market mayhem not been sparked.
It’s not just personal tax thresholds which look set to be frozen further, but council tax rises may also be on the agenda if, as expected, the government allows local authorities to raise council taxes above 2.99% each year, without a local referendum. The Sunak administration is taking a red pen to line after line of the Conservative Party manifesto, due to what it considers to be the parlous state of the nation’s finances.
The risk is that if big chunks of spending on public services or capital investment are also scribbled out, the hopes that a sustained economic recovery will be sparked through improved productivity also risk disappearing. Long waiting lists for treatment will exacerbate long term sick rates, which are partly behind the exodus of working age people from the labour market. Real term cuts to childcare funding, due to the funding not keeping up with inflation, also risk pushing more parents out of the workplace and back into the home.
One-off payments to struggling households will be welcomed to help the immediate crisis, but long-term policies to foster growth can’t be put off indefinitely. Sunak and Hunt are trying to dance to the tune of the bond markets, but by keeping so strictly to their perceived rules, they risk playing it too safe and losing even more support from the electorate.”
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