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Energy price forecast reinforce recession forecasts

Sterling traded a narrow range in the early part of the week despite some green shoots in spending data. The latest British Retail Consortium data recorded a like-for-like increase in retail sales of 1.6% in the year to July after a 1.3% decline for June.

In the meantime, Barclaycard (which accounts for close to 50% of debit and credit card spending) recorded a 7.7% annual increase in July consumer spending, but dominated by a 44% increase in utilities spending with vulnerability elsewhere. Yesterday, it again highlighted the severity of the energy price hikes due in October and January.

In short, the average household spends an estimated £164 on energy every month. This is forecasted to be circa £355 by the end of January, following the two price hikes. This reduction in disposable income reinforces the BoE recessionary forecast for Q422 and the whole of 2023.

With the talk of recession fresh in the minds of the market from the MPC assessment, all eyes will be on the GDP numbers set for release at the end of the week. The month and quarterly figures will likely report contractions. The monthly figure is expected to contract by 1.2%, whilst the flash reading of the quarterly figure indicates a contraction of -0.1%.

Dollar remains unchanged ahead of US inflation report

The US dollar gained support in the early part of this week following a series of comments from Fed speakers, continuing the recent hawkish tone while pledging to hike rates further as inflation remains elevated. Investors seemed reluctant to extend the dollar’s run into Tuesday as stock markets fell sharply and the dollar index dropped towards the 106 level ahead of critical inflation data set for release on Wednesday. 

On Tuesday, the Survey of Consumer Expectations conducted by the New York Fed on inflation revealed households saw prices fall from current levels. The 12-month outlook came in at 6.2% against 6.8% in July. Meanwhile, the 3-year outlook dropped to 3.2% in July from 3.6% previously.

Expectations for Wednesday’s release are a pullback to 8.7% from July’s 9.1% print. Meanwhile, core inflation, which strips out food and energy prices, will likely increase month on month. Recent monthly prints show signs of inflation broadening out to a wider range of goods and services. Consensus forecasts are for July’s print to provide further evidence of this, with the annual core rate of inflation rising to 6.2% from 5.9%.

The big question investors face is whether a reduction to 8.7% in the headline figure would impact a possible Fed slowdown in the pace of tightening. On the other hand, a hotter-than-expected release above expectations will likely reinforce policymaker’s aggressive stance. 

Energy price pressure continues to weigh on the euro

The euro remains under pressure against several major pairs due to rising energy prices and stagflation fears, further weighed down by headlines reporting that Russia suspended oil flows via the southern leg of the Druzhba pipeline, amid transit payment issues.

Looking ahead to the remainder of this week, it’s a light economic calendar across the Eurozone. Investors’ focus will centre on German inflation data released on Wednesday. As a key member of the European Union, the German Harmonized Index of Consumer Prices (HICP) holds significant importance. As per the market consensus, the print is expected to remain unchanged at 8.5%. However, this doesn’t reduce the likeliness of a rate hike by the European Central Bank (ECB) in the September monetary policy meeting.

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