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GOVERNMENT BONDS UNDER PRESSURE AS PUBS WARN OF LAST ORDERS WITHOUT ASSISTANCE
Data Sourced from FE Analytics, and Bloomberg Finance LP
GOVERNMENT BONDS UNDER PRESSURE AS PUBS WARN OF LAST ORDERS WITHOUT ASSISTANCE
This week the sell-off in government bonds continued on the back of not much more than a change in sentiment. The outlook hasn’t really altered but investors are expecting both inflation and interest rates to remain higher for longer. The UK is likely to see a more severe downturn than other developed markets. However, Goldman Sachs’ prediction of inflation at 22% is based on gas remaining at last week’s eyewatering levels and it has already fallen 35% since last Friday. Goldman’s base case is for inflation at 14.8% – bad but not that much worse than previous forecasts.
Meanwhile the pub industry has joined the chorus of warnings about the severity of the energy crisis. Without the benefit of price caps, pubs renegotiating their energy supplies this autumn are facing huge increases to their bills but say they can’t pass on the rising costs to customers. Liz Truss is likely to be PM this time next week and we are about the see if she can stick to her campaign promise of no handouts. Boris Johnson has limited his help to suggesting people buy a new kettle to save energy, but no prime minister wants to be blamed for the death of the British pub.
GLOBAL: BONDS TUMBLE ON EXPECTATIONS OF MORE AGGRESSIVE HIKES
Government bonds sold off heavily in August as expectation of more aggressive action from central banks took hold. The sell-off accelerated towards the end of the month after US Federal Reserve chair Jerome Powell appeared to commit to an aggressive trajectory for interest rate hikes. Recent inflation readings for the UK and Europe have added to negative sentiment and many developed equity markets have also fallen as markets attempt to price new interest rate projections and calibrate the impact of the looming recession.
The decline in UK gilts has been particularly steep and sentiment towards the UK was affected by further bleak predictions for inflation. Goldman Sachs outbid last week’s forecast from of 18% inflation by predicting that CPI could peak at 22% and this has fed speculation that the Bank of England’s base rate will be higher for longer than previously expected.
EUROPE:EMPLOYMENT REMAINS STRONG AS INFLATION CONTINUES TO RISE
Inflation in the Eurozone hit 9.1% for the year to August, up slightly from the 8.9% recorded in July. Sky high energy prices remain the main constituent of the increase in CPI. Core inflation is also still rising, although at more moderate rates as prices excluding energy, food, tobacco and alcohol came in at 4.3%. The economic outlook for Europe has deteriorated, with consumer confidence falling to the lowest level since early 2021, while manufacturing PMIs for August fell below 50. However, EU employment remains robust as the unemployment rate fell from 6.1% in June to 6% in July.
Rising inflation coupled with the strong employment data led to speculation that the European Central Bank will raise interest rates more aggressively – with several ECB members hinting at a 0.75% rise at next week’s interest rate meeting. This helped the euro to briefly rise above $1, however, concerns that high energy prices will further depress economic output meant that was short-lived.
EQUITIES: PUBS CALL CLOSING TIME WITHOUT HELP WITH ENERGY COSTS
UK pub groups have warned about a wave of closures and thousands of job losses as the industry struggles with the cost of energy, rising staffing costs and lower demand. The British Beer and Pub Association, along with six pub groups, said publicans renegotiating energy supplies are seeing energy costs rise 300%. BrewDog announced the closure of six pubs said half the UK’s pubs could shut without government action to cap energy costs.
Many pubs are carrying thousands of pounds of debt from lockdown and the industry continues to struggle with staffing as up to 20% of workers left the industry during the pandemic. The cost-of-living crisis also presents a problem for pubs as all discretionary spending is under pressure due falling consumer confidence and rising inflation. The share prices of listed pub groups have substantially lagged the wider index and this gap has widened in recent months.
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