DATA DIVE - Little Britain

Well, I suppose we can only but start this week's Data Dive with a look at the UK, the recently exposed sick man of Europe!

Now while I think the death of the Pound has been greatly exaggerated, and the idea that the recent collapse in both the currency and GILTs is a consequence of the Mini Budget is just another narrative and headline, this does not change the fact that the UK is in quite a dire situation.

The GBP/USD is down -21% from its 2022 high, from $1.37 on Jan 13th to $1.08 at the time of writing.

At its low point at the Monday open, it was down -25%

This is quite a move for the oldest still-in-use currency in the world, and once world reserve currency.

Prior to the Bank of England’s intervention, 10yr GILT Yields rose 100bps in 3 days!Did you read my Sunday note? I highlighted this.

A move of this scale and speed is quite something in the Bond market.UK GILTs look like a shitcoin, but then again pretty much every western bond does atm, so this is not a UK-only phenomenon.

Hardly surprising that the MOVE Index, i.e. bond market volatility, is trading close to all-time highs at 158.

That the mini-budget makes the UK's situation much worse than that of its US, EU or Japanese counterparts makes little sense to me.

Note also, as pointed out by Michael Howell this am, that the average maturity of UK government debt is 14.7 years while the Eurozone average is 7 years and the US 5 years 2 months. And the UK has a lower debt/ GDP ratio.

So a lot of the headlines are way overdone, buts that’s media for you.

However, I am far from trying to sugar coat the situation here. Great Britain certainly looks like it is on its way to becoming Little Britain.

UK Debt/GDP has risen 180% in 15yrs since 07 and is up 16% in the last two years, since Covid.

Meanwhile the decline in the Pound and the UK's huge external liability in Energy - which it has to import in USD - has caused the Current Account deficit to grow to a record -51B.

And the UK's Trade Deficit is also at all-time lows.

None of the above promises well for the Pound, now trading close to parity with the US Dollar and losing ground against the Euro as well.

The BoE recently only hiked +50bps vs Feds & ECB +75bps, and I would posit that the decline in the pound is more likely related to this move than the budget.

The dollar wrecking ball is hitting everyone, big or small, and the Fed's reckless and religious tightening is forcing everyone else to follow, right or wrong.

I know I have said this before and I will continue to say it ad nauseam, it is boggling to me that our Central Bankers, who so mindlessly inflated a bubble in 2020 and 2021 (plus all of the previous decade) are now so dead set on destroying it, to fight inflation, without consideration of the pain and suffering they will cause on Main Street.

You see my main concern is not the solvency of the UK Government, No, it is the solvency of the average British Consumer.

Let us see how stretched the UK consumer is before seeing how the Bank of England’s rate hike policy might affect him.

At 6.6% UK Saving Rate is at the lower end of its historical range, and all the famous Covid savings have evaporated.

Meanwhile, Consumer Credit is at the upper bound of its historical range and has been on the rise for 18 months.

Real Wages have never seen such a sharp decline in History, as inflation far outpaces any wage growth UK employees have seen. Real wages declined -3.1% year-on-year in July of 2022, a ninth consecutive month of squeeze in living costs despite nominal wages being up +5.5% YoY as of July.

Do you think the Aug and Sept data will show any improvement?

Care to know how the consumer feels about all of this?

Well, last Friday UK Consumer Confidence for Sept was reported to hit a new low, the 11th straight month of declines, and the 5th consecutive record all-time low.

Yes, the British consumer is weak. UK Retail Sales were down -1.6% in Aug, the biggest decline of the year, and as you can see have broadly been declining for over 12 months now.

On a YoY basis, Retail Sales declined -5.4% in Aug.

Let's have a quick look at how businesses are fairing.

Composite PMI is declining.

Industrial Orders have been declining.

Bankruptcies are on the rise.

And as I pointed out last week, Unemployment Claims just started to turned positive.

Ok, so now let's get to the crux of it.

A lot of the above strains are caused by inflation and energy prices.

The bank of England is hiking, partly to fight inflation, partly to fight the FED, i.e. they have no choice.

They clearly know the economy is slowing, hence why he opted for 50bps instead of 75bps like ECB and BOE

Hiking quite simply causes borrowing rates to rise, and this is an issue for the housing market.

The Avg Mortgage Rate has risen to 4.89%, and the more the BoE hikes the more it will rise.

Now while this is obviously already an issue for the estimated 850k variable rate mortgage rates in the UK, in the coming months it will increasingly become an issue for the 3-5 year fixed rate mortgages coming to the end of their fixed rate period.

I found this curious chart shared by @Alf on Twitter which shows that there is an acceleration over the coming quarters in these mortgages coming to the end of their fixed rate period.

With the UK consumer's budget already so strained and with most living paycheck to paycheck, with little or no savings, do you think they will be able to afford their mortgage payments doubling or even tripling?

And now think if the newly emerging trend off layoffs picks up speed.

Hmmmm, I reckon this will be quite difficult for many people and so I wonder how the UK housing market might hold up?

The Nation Wide Housing Index seems to have plateaued.

UK Average House Prices have also plateaued around £290k.

And Mortgage Approvals have been declining all year.

I suppose you might be thinking at this point that if you were planning on buying a house in the UK it might be worth waiting for a little, and on that, we would largely be in agreement.

At the moment house prices have remained sticky while rates have moved a lot higher.Not ideal buying conditions.

There is very little we will be able to do about the high mortgage rates for quite a while, but at the very least prices should come down - a bit, or a lot.

I hope you found this useful.

I thought it was important to contextualize the situation in the UK but at the same time diffuse some of the nonsense being thrown around by the Media.

As far as I'm concerned, and this is my personal opinion, the decision to keep the corporate tax rate at 19% is sensible, if you are going to be out of the EU you have to make yourself an attractive place to do business.

However, some of the other tax proposals make much less sense and could probably have been avoided.

Thank you for reading,

Antonio C. Nobile

I am not a Financial Advisor & this is not financial advice

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