Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US labour market remains red hot in July
The US continued to grow employment, adding over 500,000 jobs in July, more than double consensus forecasts. This increase was above the average monthly growth of c. 460,000 in the first half of this year, showing that the labour market remains historically tight.
Adding to concerns, average hourly earnings rose 0.5% over the month vs consensus forecasts of 0.3%. Whilst inflationary pressures across Europe and in the UK are predominantly being driven by the energy crisis, the picture is very different in the US which produces its own gasoline and oil. The tight jobs market and subsequent wage push inflation is driving broader price increases, particularly as the sectors experiencing the sharpest wage increases, such as Leisure and Hospitality, which has seen a 20% increase since 2020, are those least able to increase productivity and thus most likely to pass on the pressure through price increases. Policymakers at the Federal Reserve (Fed) have reiterated that the current rate of wage increases is inconsistent with their 2% inflation target.
With this latest data release, the market is now putting the likelihood of a 0.75% rise in interest rates at 75% likelihood at the next meeting in September. However, the Fed has recently removed forward guidance and given there is more inflation data to come before then, expectations could change. Whilst energy prices have fallen sharply recently, particularly those of US gasoline, it is anticipated that CPI data will show an increase in core and services inflation.
Bank of England gives gloomy inflation forecast and predicts a prolonged recession whilst raising rates
The Bank of England (BoE) raised its interest rate by 0.50% to 1.75%, the biggest such move since 1995. It signalled that inflation will not fall as quickly as it previously forecast and, perhaps most concerningly, that the UK will enter into a prolonged recession from Q4 this year and will not return to growth until Q3 2024.
Whilst the increase in interest rates by 0.50% was not much of a surprise, as the BoE’s governor, Andrew Bailey had recently indicated that this was on the table, the prediction of a prolonged recession and high inflation for a longer period did signal a change in tone.
The forecast recession will be similar in depth to the early 90s one, with a likely peak-to-trough fall in GDP of over 2%. This is in comparison to the Global Financial Crisis, where GDP fell by around 6% peak-to-trough. However, it is predicted to last for seven consecutive quarters. Given this is being driven by inflation, which in turn is being driven by external energy prices, any easing or worsening of here may change these forecasts. The BoE is now forecasting that inflation is to go above 13% in October and only fall to 5.5% by the end of 2023. The significant change in outlook is largely due to a change in how Ofgem is calculating the energy price cap and the continued increase in wholesale energy prices. The BoE also noted that under this projection, households will see the biggest fall in household incomes on record, which should eventually lead to a drop in consumption.
In order to tighten monetary conditions further, the BoE also approved active quantitative tightening (QT), provisionally from September. Up until this point, the Bank had been shrinking its balance sheet passively, by allowing bonds it purchased during the height of the pandemic to roll off its book as they matured. The BoE will be the first central bank to sell bonds back into the open market.
It was a mixed week in global equity markets, with those in the US ending in positive territory. The S&P 500 and NASDAQ both notched up their third week of consecutive gains, ending up 1.4% and 2.0% respectively, largely driven by the tech sector. However, European equities fell, with the Euro Stoxx 50 index ending the week down almost 3%.
Some of the largest falls were seen in the energy sector, with the benchmark for oil, Brent Crude, falling by over 13%. This means the oil price is down 25% from its peak in June and near the levels seen before the war in Ukraine. Food prices also fell, with the UN World Food Price Index seeing the sharpest fall since 2008. This is after the first successful shipments from Ukraine entered Turkish ports for inspection.
Bonds had another positive week, perhaps unsurprisingly driven by UK inflation-linked gilts which saw an above 3% increase.
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